Determinants of Management Earnings Forecasts: The Case of Global Shipping IPOs

AuthorDimitrios Gounopoulos,Wolfgang Drobetz,Anna Merika,Andreas Merikas
Published date01 October 2017
Date01 October 2017
Determinants of Management
Earnings Forecasts: The Case of
Global Shipping IPOs
Wolfgang Drobetz
Faculty of Business Administration, Hamburg University, 20148 Hamburg, Germany
Dimitrios Gounopoulos
Newcastle University Business School, Newcastle University, Newcastle upon Tune, NE1 4SE, UK
Anna Merika
Department of Economics, The American College of Greece, 6 Gravias Street, Agia Paraskevi, 15342 Greece
Andreas Merikas
Department of Maritime Studies, University of Piraeus, Piraeus, Greece
Firms that go public on global stock markets are not obliged to disclose earnings
forecasts in their prospectuses. We use this fact to examine the shipping industry,
where most rms voluntarily issue earnings forecasts during the IPO process, thus
providing unique, international-level evidence. We nd overall pessimistic
forecasts of ship owners, primarily because of the industrys uncertain and
volatile environment. High ship owner participation after going public is
associated with less accurate earnings forecasts. Our results further indicate that
nancial leverage, a listing in an emerging stock market, and global market
conditions are other main factors responsible for inaccurate earnings forecasts.
Keywords: earnings manage ment, voluntary disclosure en vironment, forecast
accuracy, IPOs
JEL classification: D82,G14,G32,M41
The authors are grateful to John Doukas (Editor), Biki Jaggi, Ranko Jelic, Tim Loughran,
Paul McGuinness, Mikelle Meoli, Nikos Paltalidis, Silvio Vismara two anonymous referees
and conference participants at the European Accounting Association (EAA) in Ljubljana
and seminar participants at the University of Hamburg, University of Sussex and Newcastle
University for their comments and suggestions for their comments and suggestions. We
thank Alexandrine Petridis for excellent research assistance.
European Financial Management, Vol. 23, No. 5, 2017, 9751015
doi: 10.1111/eufm.12121
© 2017 John Wiley & Sons, Ltd.
1. Introduction
Management earnings forecasts represent one of the most important sources of
information about listed companies and initial public offerings (IPOs) (Clarkson et al.,
1992; Baginski et al., 2002; Jogand McConomy, 2003; Baginski et al., 2004; Hirst et al.,
2008; Godman et al, 2014). Beyer et al. (2010) report that approximately 55% of the
accounting information available to US investors comes from such forecasts.
the popularity of voluntarymanagement earnings forecasts in the US has also become the
dominant disclosuremechanism worldwide.
Huang et al. (2014) indicatethat its mandate
was one of the most signicant corporate disclosure decisions in history, especially for
small investorswho have limited access to privateinformation. Disclosure reducesthe cost
of capital for rms, and it can combatproblems like asymmetric information and agency
problems (Dye, 1985; Healy and Palepu, 2001). Moreover, it enhances transparency,
building rmspositivereputations and contributingto an expansion in their investorbase.
In this study, we exploit the fact that a great proportion of global shipping rms
voluntarily choose to issue IPO earnings forecasts. The policy of issuing earnings
forecasts has drawn the attention of nance researchers because of its inuence on
investor decisions. Within transportation research, the interest in the various facets of
nancial reporting has been ongoing, with a focus on, e.g., alternative accounting policy
choices (Tan et al., 2002), intangible assets reporting (Lev, 2003), and managerial
discretion in assessing the reliability of nancial reporting.
However, two factors received less attention in the analysis of nancial reporting and
disclosure of earnings forecasts in the transportation industry: 1) the quality of the signal
that rms wish to transmit through earnings announcements to the nancial markets and
consequently to potential investors, and 2) how the institutional setting serves to protect
potential investors from being misled. The motivation for our study stems primarily from
this gap in the literature.
The shipping industry, with its global, highly competitive, and extremely volatile
nature, is distinct.
The majority of shipping companies that implemented an IPO
In 2010 alone, approximately 4,500 annual earnings forecasts were issued by 950 US rms,
according to First Calls company-issued guidelines database.
The majority of capital markets worldwide allow voluntary disclosure of management earnings
forecasts, although, in the past, some countries mandated the practice (e.g., Canada, Greece and
Malaysia). Over the years, and largely because of signicant forecasting errors, most local capital
market commissions recommended that earnings forecasts become solely voluntary.
The denition of shipping we use refers to all listed companies in the shipping sector on
major world exchanges, and it includes all corporations that own and/or operate ships,
regardless of what subsector they belong to. Our study does not capture technical
specications or cargo, thus, we do not distinguish among different segments of the shipping
industry. In general, the maritime industry is comprised of companies whose activities supply
innovative services and products related to the traditional maritime sector. The shipping
industry includes all enterprises engaged in the business of designing, manufacturing,
constructing, operating, acquiring, supplying, repairing and/or maintaining vessels, or
components thereof, such as managing and/or operating shipping lines, customs brokerage
services, shipyards, dry docks, marine railways, marine repair shops, shipping and freight
forwarding services, and similar enterprises.
© 2017 John Wiley & Sons, Ltd.
976 Wolfgang Drobetz, Dimitrios Gounopoulos, Anna Merika and Andreas Merikas
voluntarily announced their forecasted prots in their prospectus, thus contributing to the
rise of a generally accepted regulatory system for corporate behaviour. Nevertheless,
many difculties in forecasting earnings persist, because the industry is characterised by
long-term investments and criticalities in accounting decisions (e.g., cost capitalisation,
depreciation and residual value, and leasing) (Godman et al., 2014).
The importance of shipping lies in the fact that it constitutes an integral part of
international trade. IPOs can provide shipping rms with critical resources for future
expansion. They can secure the nancial position of ship owners by providing them with
their rst substantial access to cash. The IPO prospectus provides potential investors with
information that ought to help them when making their investment decisions. It is
common practice among shipping rms to make foreign listings due to the globalised
nature of the industry, forcing managers to address the pronounced information
asymmetries caused by the practical difculties of information penetration among
international investors.
One of the mechanisms that enables companies to reduce these information
asymmetries is the disclosure of earnings forecasts in their prospectuses (Jaggi et al.,
2006). To develop a better understanding of the relationship between management
earnings forecasts and their informational context in a globalised environment, a
comprehensive analysis of the forecast characteristics is necessary. For example, do
maritime IPOs report biased forecast earnings? Or, do they overstate or understate the
information contained in their economic variables? In this article, we are particularly
interested in US-listed shipping IPOs. However, we also aim to determine whether there
are any major differences compared to our international sample.
We compute earnings forecas t errors and nd pessimistic fore casts for the large
majority of shipping IPOs. From our sample, we then iden tify the US-listed
companies, and observe tha t NYSE-listed IPOs tend to an nounce pessimistic earni ngs
in their prospectuses, whil e Nasdaq-listed IPOs provi de relatively more optimist ic
forecasts. Companies that dis close earnings forecasts pri or to an IPO left less money
on the table when measured b y the degree of underprici ng. Overall, contrary to t he
existing US literature, our n dings indicate that ship owner s and their management
tend to provide pessimist ic earnings forecasts, tha t is, actual earnings exc eeded
forecasted prots. We attribute this nding primarily to the sectors highly volatile
We then proceed by studying the factors that determine the quality of forecasted
earnings and assemble our main hypothesis. The factors that affect forecasted earnings
quality come from three sources: 1) rm-specic idiosyncratic factors such as nancial
leverage, size, concentrated ownership, and age, 2) market-related factors such as the
state of the shipping and stock markets, and 3) institutional factors such as Generally
Accepted Accounting Principles (GAAP) and the mandatory application of International
Financial Reporting Standards (IFRS). We develop a general-to-specic (GETS) model,
based on Henry et al. (2013), and within it, use Lewbels (1997) methodology. Through
model evaluation and reduction we end up with a well-specied model that allows us to
extend the existing literature on earnings forecasts.
We also examine robustness for the location of the listing (domestic versus foreign)
and the legal system (common versus civil law). Shipping IPOs experience higher
forecast errors when they choose to list abroad rather than in their home country. Among
foreign listings, there exists an overly high forecast inaccuracy for young, small, and
highly nancially leveraged shipping companies. To address legal system effects, we test
© 2017 John Wiley & Sons, Ltd.
Management Earnings Forecasts around IPOs 977

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