Bikki Jaggi
Rutgers, The State University of New Jersey
Chen-Lung Chin
National Chung Cheng University
Hsiou-wei William Lin
National Taiwan University
Picheng Phil Lee
Pace University
Abstract: The study examines whether the Taiwan Securities and Futures Exchange Commission (TSFEC) regulation on mandatory disclosure of earnings forecasts by IPO firms encouraged managers to issue more optimistic earnings forecasts, and whether the regulationÂ’s forecast error threshold was met more through management of reported earnings than revision of initial forecasts. The study is based on 760 forecasts issued by Taiwanese IPO firms from 1991 to 2000.
The results show that the IPO firms issued more optimistic forecasts than conservative forecasts, the forecast error threshold was met by adjusting the reported earnings with discretionary accruals. Optimistic forecasts are significantly associated with positive discretionary accruals for adjustment of reported earnings upward and conservative forecasts are associated with negative discretionary accruals for adjusting the reported earnings downward. The use of forecast revisions to reduce the forecast error is insignificant. The results of a comparative analysis on management of reported earnings by IPO firms before and after promulgation of the TSFEC regulation provide additional support to earnings management by IPO firms during the regulatory period. The results thus show that the TSFEC regulation for mandatory disclosure of earnings forecasts resulted in manipulation of reported earnings, which reduced reliability and usefulness of reported earnings for investorsÂ’ decisions. The results also show that the reversion process of discretionary accruals started immediately after the requirement for disclosure of earnings forecasts expired.
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