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- Title
The Accuracy of Profit Forecasts and their Roles and Associations with IPO Firm Valuations.
- Authors
Chen, Gongmeng; Gongmeng Chen; Firth, Michael
- Abstract
China's recent economic reforms include the corporatization and listing of formerly state-owned enterprises. In order to sell shares to both domestic and foreign investors, IPOs have to overcome significant asymmetric information problems. Prospectuses for new issues in China contain forecasts of corporate profits for the next year and these forecasts can be used by investors to value companies and to make investment decisions. The study sets out to assess the accuracy of these forecasts and hence the credibility that can be attached to them. In addition to calculating various measures of accuracy and forecast superiority, we also examine the bias and rationality of the forecasts. The results show that profit forecasts are moderately accurate and they are better than time series extrapolations of historical profits. Explaining cross-sectional differences in accuracy measures proves to be difficult. Finally, the results indicate that profit forecasts are related to company valuations and that investors predict the sign, and to some extent the magnitude, of forecast errors.
- Subjects
CHINA; CORPORATE profits; GOING public (Securities); BUSINESS valuation; FORECASTING
- Publication
Journal of International Financial Management & Accounting, 1999, Vol 10, Issue 3, p202
- ISSN
0954-1314
- Publication type
Article
- DOI
10.1111/1467-646x.00051