Corporate Ownership Structure and Accuracy and Bias of Mandatory Earnings Forecast: Evidence from Taiwan

42 Pages Posted: 11 Jan 2007

See all articles by Chen-lung Chin

Chen-lung Chin

National Chengchi University (NCCU) - Department of Accounting

Gary Kleinman

Montclair State University

Picheng Lee

Pace University - Department of Accounting

Mei-Feng Lin

National Yunlin University of Science and Technology - Department of Accounting

Abstract

The primary objective of this study is to examine the association between the quality of mandatory earnings forecast, measured by forecast accuracy and bias, and the ownership structure of Taiwanese firms, measured by the divergence between the ultimate owner's control and the equity ownership level. The study is based on 528 forecasts issued by Taiwanese-listed firms from 1999 to 2001, which were affected by the regulation on disclosure-of-earnings forecasts issued by the Taiwan Securities and Futures Exchange Commission (TSFEC). First, we find that concentrated ownership structures created agency conflicts between controlling owners and outside investors. Second, we also find that firms tend to issue more inaccurate and optimistically biased forecasts in the presence of the greater divergence between the ultimate owner's control and the equity ownership level. Third, the firms with serious agency problems tended to revise their forecasts more to reduce error or bias or manipulate accruals more (e.g. through discretionary accruals) in order to avoid violating the 20 percent forecast error threshold as the end of the period approached. Finally, the resulting post-managed forecast error or bias does not significantly vary with the level of ownership concentration.

Keywords: ownership structure, mandatory earnings forecasts, earnings management, financial disclosure, information environments

JEL Classification: M41, M43, M45, G32

Suggested Citation

Chin, Chen-lung and Kleinman, Gary and Lee, Picheng and Lin, Mei-Feng, Corporate Ownership Structure and Accuracy and Bias of Mandatory Earnings Forecast: Evidence from Taiwan. Journal of International Accounting Research, Vol. 5, No. 2, 2006 ; Pace University Accounting Research Paper No. 2007/02. Available at SSRN: https://ssrn.com/abstract=954919

Chen-lung Chin (Contact Author)

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

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

Gary Kleinman

Montclair State University ( email )

NJ 07043
United States

Picheng Lee

Pace University - Department of Accounting ( email )

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

Mei-Feng Lin

National Yunlin University of Science and Technology - Department of Accounting ( email )

123, University Rd. Sec 3
Touliu, Youlin 640, Yunlin 64002
Taiwan

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