IPO Forecasts

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PRESENTATION OUTLINE

IPO FORECAST ERRORS

ZHUANG, CHEN & HAY
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IPO FORECAST ERRORS AND MANDATORY EXPLANATIONS

EVIDENCE FROM NEW ZEALAND

OVERVIEW

  • Forecasts are still inaccurate but unbiased
  • Voluntary negative assurance associated with more accuracy
  • Bigger variations: fewer explanations

QUESTION

HOW ACCURATE ARE IPO PROSPECTUS FORECASTS?
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IMPORTANCE

WHY?

  • Previous studies: NZ IPO forecasts are very inaccurate
  • Recent evidence
  • Features of New Zealand

SPECIAL FEATURES IN NZ

REQUIRED FORECASTS; REQUIRED EXPLANATIONS; VOLUNTARY NEGATIVE ASSURANCE
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NZ IPO FORECASTS

  • Required forecast (1983)
  • Required explanation of variations (FRS-42, 2006)
  • Voluntary negative assurance

Studies of Forecast Variance

28 STUDIES; VOLUNTARY OR REQUIRED; LARGE VARIANCES
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TABLE 1

  • Considerable inaccuracy and bias
  • Generally more optimistic (underachieve forecast)
  • Required forecasts do not appear to be more inaccurate

HYPOTHESES

  • NZ IPOs are inaccurate
  • NZ IPOs are biased

HYPOTHESES

  • Negative assurance, more accurate
  • More management explanations for large errors
  • More management explanations for negative errors
  • Negative forecast errors beyond management control

AFE and FE

AFE = |A-F|/|F|; FE = (A-F)/|F|
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RESEARCH DESIGN

SIGN TEST; OLS
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OLS MODELS

OLS MODELS

  • Forecast error in earnings, revenue, cashflow
  • Number of explanations
  • Negative assurance
  • Controlling for auditor, age forecast horizon, leverage, size, GFC, cross-listing

DATA

EARNINGS, REVENUES, CASH FLOW, 2006-14
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TABLE 2

TABLE 4, 6, 7

RESULTS

INACCURATE; UNBIASED

FURTHER RESULTS

  • Negative assurance: more accurate
  • Larger errors: fewer explanations
  • Larger positive or negative errors: fewer external explanations

IMPLICATIONS

BENEFITS OF NEGATIVE ASSURANCE

ISSUES

TO RESOLVE

  • More background
  • Pre-2006
  • Explanations for revenue and cashflows
  • Why fewer explanations for larger errors?
  • Market reaction to errors

David Hay

Haiku Deck Pro User