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The impact of regulatory reforms on the earnings forecasting behaviour of IPO firms

The impact of regulatory reforms on the earnings forecasting behaviour of IPO firms Purpose – The purpose of this paper is to jointly assess the impact of regulatory reform for corporate fundraising in Australia ( CLERP Act 1999) and the relaxation of ASX admission rules in 1999, on the accuracy of management earnings forecasts in initial public offer (IPO) prospectuses. The relaxation of ASX listing rules permitted a new category of new economy firms (commitments test entities (CTEs)) to list without a prior history of profitability, while the CLERP Act (introduced in 2000) was accompanied by tighter disclosure obligations and stronger enforcement action by the corporate regulator (ASIC). Design/methodology/approach – All IPO earnings forecasts in prospectuses lodged between 1998 and 2003 are examined to assess the pre‐ and post‐ CLERP Act impact. Based on active ASIC enforcement action in the post‐reform period, IPO firms are hypothesised to provide more accurate forecasts, particularly CTE firms, which are less likely to have a reasonable basis for forecasting. Research models are developed to empirically test the impact of the reforms on CTE and non‐CTE IPO firms. Findings – The new regulatory environment has had a positive impact on management forecasting behaviour. In the post‐ CLERP Act period, the accuracy of prospectus forecasts and their revisions significantly improved and, as expected, the results are primarily driven by CTE firms. However, the majority of prospectus forecasts continue to be materially inaccurate. Originality/value – The results highlight the need to control for both the changing nature of listed firms and the level of enforcement action when examining responses to regulatory changes to corporate fundraising activities. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Pacific Accounting Review Emerald Publishing

The impact of regulatory reforms on the earnings forecasting behaviour of IPO firms

Gerry Gallery; Natalie Gallery; Angela Linus
Pacific Accounting Review , Volume 23 (3): 30 – Nov 22, 2011
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References (32)

Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
0114-0582
DOI
10.1108/01140581111185517
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to jointly assess the impact of regulatory reform for corporate fundraising in Australia ( CLERP Act 1999) and the relaxation of ASX admission rules in 1999, on the accuracy of management earnings forecasts in initial public offer (IPO) prospectuses. The relaxation of ASX listing rules permitted a new category of new economy firms (commitments test entities (CTEs)) to list without a prior history of profitability, while the CLERP Act (introduced in 2000) was accompanied by tighter disclosure obligations and stronger enforcement action by the corporate regulator (ASIC). Design/methodology/approach – All IPO earnings forecasts in prospectuses lodged between 1998 and 2003 are examined to assess the pre‐ and post‐ CLERP Act impact. Based on active ASIC enforcement action in the post‐reform period, IPO firms are hypothesised to provide more accurate forecasts, particularly CTE firms, which are less likely to have a reasonable basis for forecasting. Research models are developed to empirically test the impact of the reforms on CTE and non‐CTE IPO firms. Findings – The new regulatory environment has had a positive impact on management forecasting behaviour. In the post‐ CLERP Act period, the accuracy of prospectus forecasts and their revisions significantly improved and, as expected, the results are primarily driven by CTE firms. However, the majority of prospectus forecasts continue to be materially inaccurate. Originality/value – The results highlight the need to control for both the changing nature of listed firms and the level of enforcement action when examining responses to regulatory changes to corporate fundraising activities.

Journal

Pacific Accounting Review – Emerald Publishing

Published: Nov 22, 2011

Keywords: Australia; Organizational earnings; Regulation; Initial public offerings; Prospectus forecasts; Management earnings forecasts; Continuous disclosure; Commitments test entities

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