Mandatory vs Voluntary Management Earning Forecasts

Abstract

Companies making initial public offerings in Greece were obliged to include next year’s profit in the new issue prospectuses, in order to help investors’ value companies and make safe investment decisions, until the regulations changed to voluntary status. This study takes advantage of this regulation alteration and compares the accuracy of earnings forecasts under both mandatory and voluntary disclosure environments. In order to achieve this it uses a large data set of 305 IPOs, which were floated during January 1993 to June 2009 period and employs a number of error metrics to examine forecast accuracy. Findings indicate behavioural change as earnings forecast pessimistic trend during the mandatory era turns to optimistic in the voluntary period. The comparison of those two methods suggests that mandatory earnings forecast regulation may force firms to forecast that have nor the incentives neither the ability to do so. Instead, the results imply that regulations penalizing I