Entrepreneurial Bias in Management Earnings Forecasts

• In Event: Financial Accounting and Reporting 2

Abstract

We examine the errors in management forecasts of initial public offerings (IPO) firms in the subsequent three years following the first day of the public trading and compare the IPO forecast errors with the management forecast errors of non-IPO firms. We contend that since IPO companies tend to exaggerate their prospects (which we label entrepreneurial bias) in order to help raise capital at the time of the IPO, this optimistic bias continues even after the IPO has occurred. Accordingly, we hypothesize that the earnings forecasts of IPO companies exhibit greater optimism in their forecasts and this results in greater optimistic forecast errors relative to the earnings forecasts of non-IPO companies. Consistent with this hypothesis, we find that in the three years after going public, IPO companies are significantly over-optimistic in their management earnings forecasts. Our results are consistent with IPO managers’ propensity to disseminate positive information to potential investors to make investments in their IPO companies and then to continue to optimism so as to increase the likelihood the IPO will survive.

Authors

• Yu-Ho Chi, University of North Carolina-Pembroke

• David A Ziebart, University of Kentucky