|Wong, Hon-man Jody
|Forecast accuracy and earnings performance of initial public offerings in Hong Kong
|Going public (Securities) -- China -- Hong Kong
Business forecasting -- China -- Hong Kong
Hong Kong Polytechnic University -- Dissertations
Department of Accountancy
|vi, 149 leaves : ill. ; 30 cm
|Profit forecasts of newly listed companies form a significant subset of information digested by the investors in evaluating the shares on offer. This study examined 239 initial public offerings (IPOs) of non-financial companies listed on the Stock Exchange of Hong Kong between 1990 and 1995 and found that profit forecasts contained in the prospectuses are, on average, accurate and conservative. In general, forecast tends to be more accurate for smaller company, shorter forecast horizon, and if the interim results are being audited. Despite this high accuracy, profit forecasts are not a reliable guide to the future profitability of these companies. This study reveals that the IPOs as a whole exhibits a fall in post-issue profitability, and the decline is most pronounced in the first financial year following the year in which the listing took place. Using discretionary current accruals (DCA) estimation model, I found that DCA is very high in the year of listing and falling steadily afterwards. These findings are consistent with managers opportunistically managed earnings upwards in the year of IPO and the increased agency costs associated with the reduction in management shareholding when the company goes public. The pervasiveness of earnings management among IPOs, however, undermined the high accuracy observed in prospectus profit forecast. This study found that smaller companies, companies with lower ownership retention by the original shareholders, companies having higher variability in pre-listing profits and companies which aggressively used income-increasing accruals in the year of listing experienced more significant deterioration in post-issue performance. Furthermore, it was found that earnings management is more pronounced among small and less highly-geared companies. Investors are cautioned that companies which experienced phenomenon growth in profits prior to listing and whose actual profits are substantially higher than the forecasts disclosed in the prospectuses might have engaged in more earnings management.
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