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The Accuracy of Profit Forecasts and their Roles and Associations with IPO Firm Valuations
Author(s) -
Chen Gongmeng,
Firth Michael
Publication year - 1999
Publication title -
journal of international financial management and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.818
H-Index - 37
eISSN - 1467-646X
pISSN - 0954-1314
DOI - 10.1111/1467-646x.00051
Subject(s) - initial public offering , prospectus , credibility , profit (economics) , business , economics , china , econometrics , consensus forecast , financial economics , finance , microeconomics , political science , law
China's recent economic reforms include the corporatization and listing of formerly state‐owned enterprises. In order to sell shares to both domestic and foreign investors, IPOs have to overcome significant asymmetric information problems. Prospectuses for new issues in China contain forecasts of corporate profits for the next year and these forecasts can be used by investors to value companies and to make investment decisions. The study sets out to assess the accuracy of these forecasts and hence the credibility that can be attached to them. In addition to calculating various measures of accuracy and forecast superiority, we also examine the bias and rationality of the forecasts. The results show that profit forecasts are moderately accurate and they are better than time series extrapolations of historical profits. Explaining cross‐sectional differences in accuracy measures proves to be difficult. Finally, the results indicate that profit forecasts are related to company valuations and that investors predict the sign, and to some extent the magnitude, of forecast errors.