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IPO performance and earnings expectations: some French evidence

IPO performance and earnings expectations: some French evidence

sample for which there

sample for which there is at least one analyst following the stock and for which analyst forecasts are reported in the I/B/E/S tapes, we select the first EPS forecast for the next 3 fiscal years issued by each of the analysts who follow the stock, if this first forecast is issued within the 12-month period following the IPO. Another condition we impose it that no earnings were announced between the IPO and the forecast 9 . We also construct a control sample of seasoned firms listed on the Paris Stock Exchange by selecting in the analyst-by-analyst I/B/E/S data set all analysts’ earnings forecasts for the next three fiscal years issued between 1991 and 1998. For both the IPO and the seasoned sample, actual earnings per share come from the I/B/E/S consensus data set. In each panel of Table 4, the number of forecasts and firms in each category appears in the first row. Note that the number of IPO firms for which we have prospectus data is smaller than the total number of IPOs. First there are some IPOs for which we could not find the information on forecasts, which is published in a separate document from the main document from which we collected our previous information. Second, we only selected observations for which we know the actual earnings per share. Thus, we had to exclude some IPO firms that are not followed in the I/B/E/S consensus database. Similarly, we exclude some IPO firms that did not appear in the analyst-by-analyst I/B/E/S data set 10 . We also note that the number of forecasts decreases with the horizon (i.e. there are more forecasts available for period 1, the next earnings announcement date, than for periods 2 and 3). The reason is simply that some analysts only make short-term forecasts. Analyst following depends on some firm-specific factors. The one for which evidence is the most robust is size (see Bhushan (1989)) : analysts are more willing to issue reports on large 9 The idea behind these rules is that we want the IPO to be the last major public event undergone by the firm before the forecast is issued. Thus, if a forecast is issued for a given company 6 months after its IPO but 2 months after an earnings announcement, we consider another major public event has taken place between the IPO and the forecast and we rule out the observation. 10 For those firms, we do not know if the reason why they do not appear in the data set is because they were not followed by any analyst at all or because they were not followed by I/B/E/S. 16

companies. One possible reason is that large companies’ stocks generate the largest volumes of transaction, i.e. the ones on which brokers obtain the largest brokerage fees. This is confirmed in our sample. If we split our IPO sample in two equal-size groups depending on market capitalization (our proxy for size), small-size firms are followed on average by 2.67 analysts, whereas large firms are followed on average by 6.32 analysts 11 . In order to capture the impact of size (and potentially of other variables) on analyst following in our coming tests, we present two kinds of results. First, by-analyst results, in which each forecast will be equally-weighted, i.e. in which some companies will be over-weighted because they are followed by more analysts than the average company. Second, we will provide by-company results, in which each company will be given the same weight no matter how many analysts follow it. 6-3- Evidence on forecast errors In Table 4, we present three different kinds of forecast errors. First those that appear in pre- IPO prospectuses, second those that are made by analysts at or around the IPO date for IPO firms, and third, the errors made by analysts for non-IPO firms in the period we study (1991 – 1998). We study these three types of forecast errors separately, and compare them later in this section. 6.3.1 Prospectus Forecast Errors (PFE) These errors come from pre-IPO prospectuses. Firms that go public on the Nouveau Marché, the exchange for young high-technology firms, are required to provide three years of earnings forecasts. When firms go public on the Second Marché, though it is not explicitly required, this information is always provided in the “Financial analysis”, a document in which the underwriter relates the IPO price to its estimation of the firm value. 11 Here we consider that an analyst has “followed” a company if he has issued at least one earnings forecast within the one-year period following its IPO and before any earnings announcement. 17

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