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Earnings forecast disclosure regulation and earnings management: evidence from Taiwan IPO firms

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Abstract

This study examines whether the Taiwanese regulation requiring disclosure of earnings forecasts in the IPOs resulted in disclosure of more optimistic earnings forecasts and whether the forecast error was reduced more by manipulating the reported earnings rather than revising the earnings forecasts to meet the forecast error threshold. The study is based on 759 forecasts issued by the Taiwanese IPO firms from 1994 to 2001, i.e. 8-year period after the regulation was modified to increase the forecast error threshold to 20%.

The findings show that the disclosure regulation resulted in more optimistic forecasts than conservative forecasts, especially for firms expecting better performance in the forecast year compared to the previous year. Firms disclosing optimistic earnings forecasts engaged more in manipulation of reported earnings than revision of forecasts to meet the forecast error threshold. These findings thus suggest that the disclosure regulation resulted in earnings manipulation, which reduced the quality of reported earnings.

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Author information

Authors and Affiliations

  1. Faculty of Management School of Business, Rutgers University, New Brunswick Piscataway, NJ, 08854

    Bikki Jaggi

  2. Department of Accounting, National Cheng Chi University, Taipei, Taiwan

    Chen-lung Chin

  3. Department and Graduate Institute of International Business, National Taiwan University, Taipei, Taiwain

    Hsiou-wei William Lin

  4. Department of Accounting, Lubin School of Business, Pace University, New York, NY, 10038

    Picheng Lee

Authors
  1. Bikki Jaggi
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  2. Chen-lung Chin
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  3. Hsiou-wei William Lin
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  4. Picheng Lee
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Corresponding author

Correspondence to Bikki Jaggi.

Additional information

We received valuable comments at the 2003 American Accounting Association and 2004 Euorpean Accounting Association annual meetings. We also thank the participants at the research seminars at Rutgers University, City University of Hong Kong, and Pace University, for their insightful comments. Picheng Lee especially thanks Pace University for 2003 summer research grant.

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Jaggi, B., Chin, Cl., William Lin, Hw. et al. Earnings forecast disclosure regulation and earnings management: evidence from Taiwan IPO firms. Rev Quant Finan Acc 26, 275–299 (2006). https://doi.org/10.1007/s11156-006-7434-2

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