An Empirical Analysis of the Bias and Rationality of Profit Forecasts Published in New Issue Prospectuses

T.Y. Cheng and Michael Firth

Journal of Business Finance & Accounting, 2000, vol. 27, issue 3‐4, 423-446

Abstract: Our study sets out to assess the accuracy of profit forecasts made by IPOs in Hong Kong. We use a variety of measures and tests to examine the accuracy, bias, rationality, and superiority of earnings estimates. The results show that forecast accuracy compares favourably with the findings from the developed economies of Australia, Britain, Canada, and New Zealand. Forecasts are shown to be superior to the predictions from time series models. IPOs tend to underforecast in the sense that actual profits exceed the forecasts. The rationality tests show mixed results. Cross‐sectional analyses of forecast accuracy have poor explanatory power although the Big Six reporting accountants are associated with smaller forecast errors.

Date: 2000
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