The Voluntary Disclosure of Profits Forecasts in UK IPOs Prospectuses, Its Determinants and Implications

Abstract

This study examines the differences between IPOs that voluntarily disclose earnings forecasts in their prospectuses and those that do not. Using a sample of 166 UK IPOs listed between 1992-2002, we investigate whether forecasters have different firms’ characteristics than non forecasters and whether they perform differently in the short and medium term. The results support the hypotheses that forecasters are firms that are closer to their financial year-end, have lower past profit variability, and higher growth prospect than non forecasters. However, the initial and after market returns of forecasters are not better than that of non forecasters. We also find evidence that optimistic forecasters, ceteris paribus, significantly underperform conservative forecasters and non forecasters in the mid term. Moreover, at the time of going public, investors can use earnings predicted by time series models to asses the performance of forecasters IPOs.

Keywords: Initial public offerings, voluntary disclosure, forecast accuracy

JEL Classification: G32