Abstract
This paper aimed to investigate the effect of corporate governance mechanism on the risk of IPO earnings forecasts errors. It focuses on the relationship between the board of directors characteristics and the risk of earnings forecasts errors. Required data was gathered from 190 Malaysian IPO prospectuses for the year 2002 to 2012, after which data was analyzed using ordinary least squares (OLS) regression. Based on the obtained findings, the earnings forecasts of Malaysian IPO reflected a pessimistic picture with unsatisfactory percentage of accuracy. In particular, the findings of multiple regression analysis of the relationships between the size, independence and CEO duality of the board of directors, and the risk of earnings forecasts errors were negative and insignificant. The study findings have several implications for relevant individuals, including regulators, investors, financial analysts and financial statements users.
Highlights
The IPO prospectus contains a huge amount of significant information, one of which is the management earnings forecasts figure and its quality reflected by its accuracy, and this has garnered increasing research interest (Hutton & Stocken, 2010)
The gap between unaudited earnings and actual earnings was found to be less for firms with independent board of directors, which means firms with effective governance report accurate earnings and as such, this study proposes the following hypothesis for testing; H2: Board independence is positively associated with the accuracy of management earnings forecasts
Moving on to the characteristics of the board – board size (BSIZE) was 7 for the whole sample, notably, the IPO firms had over four board of directors members
Summary
The IPO prospectus contains a huge amount of significant information, one of which is the management earnings forecasts figure and its quality reflected by its accuracy, and this has garnered increasing research interest (Hutton & Stocken, 2010). Most investors do not have access to sufficient information for the evaluation of the value of the reporting system of the IPO firm and they take recourse in examining quality of factors including corporate governance structure, as these contribute to establishing the earnings reporting system credibility (Siagian & Tresnaningsih, 2011). According to Chapple et al (2018), there is a significant influence of corporate governance on management earnings forecast behavior, while other studies of the same caliber (e.g., Karamanou & Vafeas, 2005; Mnif, 2010; Ahmad-Zaluki & Wan-Hussin, 2010) indicated that well-structured corporate governance mechanisms, like the board of directors, can signal the financial information quality and credibility and this includes earnings forecasts
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