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Title: The effect of forecast earnings errors in pro prospectus on shareholders return
Authors: Baharuddin M. Hussin
Farizah Sulong
Shazlini Osman
Keywords: Initial public offerings
Forecast errors
Earnings announcement
Stock returns
Issue Date: 2004
Publisher: Universiti Tenaga Nasional
Abstract: The value of information published in the prospectus of initial public offerings (IPO) should not be disregarded in investment decisions. In Malaysia, Singapore and New Zealand, the prospectus itself does not only provide potential investors with the past history and background information of the listed issuer but also its forecasted future performance. Since share prices basically represent the future expectations of the firm's performance, the forecast earnings from the management's expectations of the firm's future prospects forms a fundamental part of valuation process by investor. This research address the issue of the accuracy of management forecast earnings provided in the IPO prospectus to determine whether the earnings announcement has information content influencing share price movements and thus shareholders return. The effect of forecast earnings errors to shareholders return is examined by using a sample of 119 IPOs listed in the Kuala Lumpur Stock Exchange from 1999 to 2002. The research question is evaluated within the framework of a return generating linear regression model similar to that employed by Henry (2002) and Pownall (1993), to identify whether forecast earning errors in the IPO provides signaling effect to the share price movements. The findings suggest that earnings forecast in the IPO prospectus has information content thus provides a useful information for investors to develop expectations regarding the future IPO performance in the initial year of listing and there is a symmetrical relationship between the accuracy of forecast earnings and the stockholders returns in the context of IPO. The study concludes that the market rewards firms beating the earnings forecast with higher stock price movements and penalizes firms that fail to meet their earnings forecast provided in the IPO prospectus with lower stock price movements surrounding the earnings announcement date. The share price reacting is also greater in response to negative forecast errors on the earnings announcement date.
Appears in Collections:College of Business Management & Administration

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