Views
5 years ago

IPO performance and earnings expectations: some French evidence

IPO performance and earnings expectations: some French evidence

Indeed, we expect

Indeed, we expect analysts issuing type 1 and 2 forecasts, i.e. affiliated analysts, to have strong reputation and even legal 15 incentives to make forecasts that are highly correlated to the ones they issued in pre-IPO prospectuses, unless news affecting the company’s future came up between the IPO date and the forecast date. Similarly, we expect type 3 and 4 forecasts to be less influenced by pre-IPO forecasts, though it is likely that analysts used the information contained in the prospectus to make up their own forecasts. The results we find support this hypothesis; type 1 forecasts have a correlation coefficient with prospectus forecasts equal to 0.8697 versus 0.7568, 0.6784, and 0.2713 for Type 2, 3 and 4 forecasts respectively. 6-4- Market reaction to forecast errors Next we investigate market reaction to forecast errors. In the previous section, we showed that all types of analyst predictions have a significant optimistic bias. What we would like to know next is whether the market in naïve about this over-optimism or if investors take it into account when they form their beliefs. To answer that question, we look at the relationship between forecast errors and market performance of the IPOs in our sample. The equation we estimate is the following: AR = α + β*FE + ε where AR is the abnormal return over the period from beginning of the fiscal year (or forecast date if fiscal year started before the IPO) to the date when actual earnings are known and FE is the forecast error. The performance variable we consider (AR) is Cumulative Average Return (CAR) relative to a comparison portfolio of firms with similar size / book-to-market values 16 . 15 However, to the best of our knowledge, there is no example of any underwriter being sued for providing erroneous information about a company. 16 We choose this measure for the same reasons as in Chapter 6. Our findings still hold with other performance measures. 24

Forecast errors (FE) can be those made in pre-IPO prospectuses or in analyst reports issued around IPO dates. If the “naïve market” hypothesis is right, we should obtain a significantly positive β coefficient: everything else equal, a larger positive forecast error (i.e. a less optimistic forecast) should entail a larger positive market reaction. If, on the contrary, the market fully anticipates forecast biases, the β coefficient should be equal to 0. Another possible explanation for a β coefficient equal to 0 is that investors might disregard analyst forecasts when they form their beliefs about a firm value. Indeed, if this is the case, an earnings surprise relative to forecasts will have no impact on those beliefs. The results we obtain are presented in Table 7. In Panel A, we regress long term adjusted returns on Prospectus Forecast Errors (PFE). We notice that the β coefficient is significantly positive at conventional levels only for the third forecast year. In Panel B, we run the same regression, but we replace PFE by AFE, Analyst Forecast Errors. The results in both tables are quite similar, though the method we use in second table is more conservative since we take the average variables for each firm / forecast year, considering only one observation per firm / forecast year. The results suggest that the impact of AFE on long-term performance is larger than the influence of PFE : all β coefficients but one are significantly positive at conventional levels. A natural explanation of that difference is that investors are more suspicious about forecasts issued by affiliated analysts. Consequently, they might anticipate biases when forecasts come from affiliated analysts (or they might even disregard those forecasts), that is pre-IPO forecasts and type 1 and 2 post-IPO forecasts. A test of this hypothesis can be conducted by analyzing the impact of Analyst Forecast Errors on long term performance by analyst affiliation. 25

Initial Public Offerings: The mechanics and performance of IPOs (Harriman Finance Essentials)
Evidence regarding the stock market's overreaction to management ...
Earnings Management and IPOS – Evidence from Finland - LTA
Does Meeting Earnings Expectations Matter? Evidence from Analyst ...
Some Evidence on the Relationship Between Performance Related ...
Earnings Management and the Long-Run Market Performance of ...
The Rewards to Meeting or Beating Earnings Expectations
Earnings Management in IPO - Marriott School
IPO Underpricing, Firm Quality, and Analyst Forecasts
Intangible Assets and Valuation of IPOs - Intellectual Property ...
BENCHMARK-SENSITIVITY OF IPO LONG-RUN PERFORMANCE ...
Detecting Information Pooling: Evidence from Earnings ... - FDIC
Understanding Analysts' Earnings Expectations - Rady School of ...
Earnings Quality: Evidence from the Field - Rotman School of ...
Earnings Surprises, Growth Expectations, and Stock Returns:
Information Content of Earnings Management: Evidence - Krannert ...
Who provides a certification effect? Evidence from IPOs on the ...
What Comprises IPO Initial Returns: Evidence from the Chinese ...
The Post Offering Performance of IPOs in the Banking Industry
What Drives the Initial Market Performance of ... - IPO-Underpricing
Empirical Evidence on the Evolution of International Earnings
Do IPOs Underperform in the Long-Run? New Evidence ... - Cirano
Family Control and Earnings Management: Malaysia Evidence - ipedr
The Acquisition of Prosody: Evidence from French - Haskins ...
Product Market Competition and Earnings Management: Some ...
Evidence of Performance - HUECK + RICHTER Aluminium GmbH
Performance of Initial Public Offerings: The Evidence for Switzerland
Earnings Conservatism: Panel Data Evidence from the EU and the US