Intermediary Independence and the Strategic use of Accounting numbers

Abstract

Evidence from 110 firms that included an earnings forecast in prospectuses filed with the Ontario Securities Commission are used to examine the correlation between optimistic earning forecast and intermediary incentives. The findings provides aggregate evidence that contradicts dominant assumptions about the workings of the new stock issue process. in particular, the current study demonstrates that: (1) underwriters are not neutral participants in the new stock issue process; and (2) higher-reputation underwriters and public accountants are more likely to be associated with accurate accounting information than are their lower-reputation colleagues. By providing such evidence, this study resonates with previous studies that have examined the strategic use of accounting numbers and with previous studies that have examined the partisan location of intermediaries in capital accumulation processes.