Voluntary disclosure of management earnings forecasts in IPO prospectuses

The main purpose of this paper is to investigate the absolute and incremental impact of voluntary disclosure of management earnings forecasts in prospectuses on IPO underpricing and post-issue return performance using a sample of 258 Canadian firms over the period 1983-1994. Unless managers of IPOs have a specific reason not to forecast, such as prohibitively high proprietary costs or poor income expectations, our results indicate that it is generally in their best interest to include such forecasts in their prospectuses. This is especially the case for small firms where the degree of information asymmetry, as well as costs of acquiring information for uninformed investors, may be high. Our results also indicate that the use of earning forecasts is generally beneficial even if firms are using other voluntary disclosure mechanisms and utilize additional credibility signals (such as choosing a reputable investment banker or a large audit firm)