THE ACCURACY OF MANAGEMENT EARNINGS FORECAST AND
I Gusti Ayu Esika
School of Accounting & Finance
BINUS Business School – BINUS University
Jl. Hang Lekir I No.6 Jakarta, 12120
Telp. +62 21 720 2222; Fax. +62 21 720 5555
Prior studies showed that IPO earnings forecasts robustly related to the IPO initial market valuation and its short-run performance. This study investigated the impact of management earning forecasts on the long run performance of IPOs in Indonesia Stock Exchange (IDX). The accuracy of IPO was revealed at the end of financial IPO year when the actual earnings was announced. The relative accuracy would affect the pricing process in the market that in turn it would affect the IPO 1 year performance. Unlike most prior studies, this study used relative forecast bias, as the direction of the bias would have different impact on the IPO after-market performance. Using 94 IPOs that went public in 2000-2008 in IDX, this study found some interesting results. About 68% of sample produced downward bias (negative forecast error) meaning that those companies could not achieve their earnings target disclosed in the IPO prospectuses. This study found different characteristics between the upward bias (positive forecast errors) IPOs and the downward (negative forecast errors) IPOs. The upward bias IPOs had a better 1-year performance than the downward bias IPOs. They also appeared to have a higher initial performance. The upward bias tended to be big companies and sold lower percentage of equity at the IPO. However, they appeared to be statistically insignificant. Finally, the cross section analysis result showed a robust evidence to support the research hypothesis that the forecast bias positively related to the IPO 1-year performance.
Key words: IPO, Management earning forecast, IPO performance, IDX