The accuracy of management profit forecasts in IPO prospectuses

Abstract

Purpose – The purpose of this paper is to measure the accuracy of management profit forecast in initial public offerings (IPO) prospectuses and investigate the determinants of any observed forecast error in Indonesia. Design/methodology/approach – A sample of 105 Indonesian IPO firms over a ten-year period, 1999-2008, is used in the present study. The accuracy of management profit forecasts, or forecast errors, in IPO prospectuses is calculated, following Lee et al. (2006), over the ten-year sample period. Then, a multivariate model, following the extant literature, is used to identify the determinants of any observed forecast error in Indonesia. Findings – A mean (median) forecast error of 19 percent (9 percent) is reported over the entire sample period. Multivariate analysis shows that, among the explanatory variables used in the present study, forecast horizon and management optimism seem to be the most significant determinants of forecast error in Indonesia. Research limitations/implications – The ordinary, specifically small, investors in Indonesia lack the sophistication needed to evaluate new issues while alternative independent sources of information or analysis on IPOs are virtually non-existent. Consequently, whether the forecasts made by the managers during IPOs are reliable or not is of particular importance in Indonesia. Originality/value – Indonesia is a significant emerging market in Asia. However, to date, no published work has examined the accuracy of management profit forecasts or forecast errors in this market. The present study attempts to fill this gap in the literature and is the first to capture the magnitude/degree of forecast accuracy or error and investigate the determinants of the documented forecast error in Indonesia using a sample of 105 IPO firms over the period 1999 through 2008.