An empirical study of forecasts in prospectuses issued by New Zealand companies : recent evidence

Abstract

This study examined the accuracy and bias of profit forecasts disclosed in prospectuses by New Zealand companies for initial public offerings (IPOs) from 1987 to 1994, and some of the determinants of accuracy and bias.

Accuracy was measured by absolute relative errors, while bias was measured by signed relative errors. The sign test was used to examine the accuracy and bias. Both univariate and multivariate analyses were performed to examine the relationships between forecast accuracy and bias and the independent variables, namely, previous trading history, forecast period, company size, industry grouping and the year of forecast. A final sample of 90 useable forecasts was obtained from 54 prospectuses issued by newly listed companies.

The results showed that profit forecasts disclosed by newly listed companies between 1987 and 1994 were, on average, more accurate than those prior to 1987. However, the evidence failed to support the hypothesis that profit forecasts are accurate. In examining forecast bias, the evidence showed that the forecasts were, on average, pessimistic to a small degree, but did not reject the hypothesis that profit forecasts are unbiased.

In the univariate analysis, forecast accuracy was found to be significantly related to previous trading history, forecast period, company size and the year of forecast. However, in the regression analysis, only the year of forecast and company size were significantly related to forecast accuracy.

Forecast bias was found to be significantly related only to company size in the univariate analysis. In the regression analysis, previous trading history and the year 1987 were found to be significantly related to pessimistic forecasts, while only the year 1987 was significantly related to optimistic forecasts.