Earnings Forecasts Disclosure Regulation and Earnings Management by IPO Firms

Posted: 3 Nov 2003

See all articles by Bikki Jaggi

Bikki Jaggi

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Chen-lung Chin

National Chengchi University (NCCU) - Department of Accounting

Hsiou-Wei Lin

National Taiwan University

Picheng Lee

Pace University - Department of Accounting

Abstract

This study examines whether a regulation on mandatory disclosure of earnings forecasts encourages managers to issue more optimistic earnings forecasts, and whether the optimistic forecasts are revised downward or the reported earnings are managed upward using discretionary accruals to reduce the forecast error. Additionally, it evaluates how investors react to earnings management and forecast revisions. The study is based on 760 forecasts issued by Taiwan IPO firms from 1991 to 2000 after the regulation to issue the earnings forecasts was imposed by the Taiwan Securities and Futures Exchange Commission (TSFEC) and it also uses a sample of 86 IPO firms prior to the issue of regulation.

The results show that the IPO firms issue more optimistic forecasts than conservative forecasts. They adjust their reported earnings of optimistic forecasts upward with discretionary accruals more than revising the earnings forecasts downward, whereas they revise conservative forecasts upward more than adjusting the reported earnings downward. The results on the comparative analysis of earnings management by IPO firms before and after issuance of the TSFEC regulation provide additional support to the findings that earnings management by IPO firms increased significantly after the regulation was imposed. The results on investors' reaction to reported earnings show that investors reacted positively to higher reported earnings compared to the last revision of forecasts and they ignored the upward adjustment of reported earnings. Their reaction has been negative to downward revisions and positive to upward revisions.

JEL Classification: M41, M45, G12

Suggested Citation

Jaggi, Bikki and Chin, Chen-lung and Lin, Hsiou-Wei and Lee, Picheng, Earnings Forecasts Disclosure Regulation and Earnings Management by IPO Firms. Review of Quantitative Finance & Accounting, Vol. 26, No. 3, 2006; Pace University Accounting Research Paper No. 2003/03. Available at SSRN: https://ssrn.com/abstract=459021

Bikki Jaggi (Contact Author)

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

100B Rockafeller Road
Piscataway, NJ 08854
United States

Chen-lung Chin

National Chengchi University (NCCU) - Department of Accounting ( email )

No. 64, Sec 2
Chih-Nan Road
Wenshan, Taipei
Taiwan

Hsiou-Wei Lin

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Picheng Lee

Pace University - Department of Accounting ( email )

1 Pace Plaza
New York, NY 10038-1502
United States

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