The impact of IFRS adoption on IPO management earnings forecasts in Australia

Abstract

We investigate the accuracy of management earnings forecasts under International Financial Reporting Standards (IFRS) in the context of an initial public offering (IPO). We observe a decline in management forecast errors (FEs) in Australia following the mandatory implementation of IFRS in 2005. Further evidence suggests that IPO management earnings forecasts become more conservative in post-IFRS periods. We argue that IFRS enables investors to better evaluate IPO firms’ performance and demand higher returns from firms that report inflated and inaccurate earnings forecasts. We also show that over-optimistic earnings forecasts and larger forecasting errors result in greater underpricing under the IFRS regime. Overall, this study suggests that IFRS, as a set of high-quality accounting standards, improved corporate disclosure quality and the information environment.

Keywords: IFRS, IPOs, information environment, forecast accuracy, accounting quality

JEL Classification: G14, G15, M41