Information Content Of Listed Companies' Management Earnings Forecasts

Information content of listed companies'accounting information has been the issue of greatest concern to investors, but the accounting fraud and accounting information distortion made users be lack of necessary "sense of security." Particularly in Chinese securities market that is not mature, there are some blind spots more or less in the supervisory departments'surveillance to listed companies, and relevant policies and regulations are not perfect. Furthermore there are a large number of individual investors, who have limited ability to understand information on listed companies, in the stock market. So the false information will bring extremely adverse impact on investors and the securities market. Historical information which reflects listed companies'past financial position,operating results and cash flow, has relatively stronger authenticity,neutrality and verifiable, but it is lack of timeliness,predictive value and value of feedback. Because of the shortcomings of historical information, the users'desire for forecast information increases. The surveys made by Liansheng Wu (2000) and Wenjiang Li (2006) showed the same result that investors have strong demand awareness to forecast information.The earnings forecasts issued by management timely transfers the information of company's operating results to users. But, because it has inherent uncertainty, the risk of using such information increases naturally. R. A. Daily (1971) opined that the reasonable accuracy of the information is a prerequisite for the relevance of the information. Otherwise, investors will lose confidence on this information, and then will not use such information. But from another point of view, inaccurate forecast information is of certain value, because it can convey to investors the information of the quality and capabilities of the management. Therefore, as long as the listed companies disclose their earnings forecasts, this information will transmit a number of information to investors in different degrees. In China, many scholars (Zongyu Xu, 2000; Gang Wei, 2001; Peixin Wang, 2003) studied the accuracy of earnings forecast by forecast error. In addition, they researched the relationship between the accuracy of earnings forecast and other factors, such as auditing,institutional changes,the size of companies,the issue price and the forecast length. Therefore, researchers and users'concern on the accuracy of earnings forecast is evident.Davidson (1973) believed that the most important thing is not the accuracy of management earnings forecasts, but the accuracy of anticipative number by using the management earnings forecasts. The usefulness of information is the function of the reliability and the pertinence of it. The most important criteria to judge the information content of accounting information is whether this information can ultimately affect users'decision-making. We not only need research the accuracy, but also study the pertinence. Consequently, many scholars put their line of sight on the relation between disclosing earnings forecast information and the change of stock price (or volume).Chinese scholars'previous studies mostly concentrated in the information content of IPO's earnings forecasts. But with implementing the earnings pre-annunciation system, the management earnings pre-annunciation becomes an important component of management earnings forecasts, and scholars have paid more attention to the management earnings pre-annunciation. In fact, the frequency and number of management earnings pre-annunciation are far higher than that of IPO. In order to reflect the information content of management earnings forecasts synthetically, the IPO's management earnings forecasts and management earnings pre-annunciation are included in the scope of our study.The paper analyzed and summarized the disclosure systems of the IPO's management earnings forecasts and the management earnings pre-annunciation systemically, and through reviewing the current literatures made conclusion that China's securities market has already reached Weak-Form Efficiency. The author first analyzed the information content of management earnings forecasts theoretically, and then verified this conclusion using the data of Shanghai and Shenzhen stock markets. Using the sample of 71 IPO companies from March 15, 2001 to December 31, 2006 which disclosed management earnings forecasts, I inspected IPO companies'disclosure behavior under the voluntary disclosure system, such as the disclosure desire,the accuracy of forecasts, the market reaction of voluntary disclosure,the factors associated with voluntary disclosure,the rational degree of management earnings forecasts and the forecast error's influence on the stock pricing. After 2002 earnings pre-annunciation system has been relatively mature. Selecting the sample of 2955 earnings pre-annunciation made by 887 listed companies from 2003 to 2005, I carried on descriptive statistic analysis on the disclosure of earnings pre-annunciation from different angles, and studied the accuracy of earnings pre-annunciation, the market response to different types of earnings pre-annunciation and the market effect of earnings pre-annunciation revision comprehensively.This paper came to the following conclusions: the changes of IPO earnings forecasts disclosure principles significantly affected the accuracy of the earnings forecasts and disclosure desire. The accuracy of earnings forecasts was interrelated with the size of companies. The remarkable difference market reaction between forecast corporate and non-forecast corporate and the forecast error's impact on the stock pricing indicated that the earnings forecasts voluntarily disclosed by IPO companies have information content. The comparative analysis on various types of earnings pre-annunciation showed that the market reaction to various types of earnings pre-annunciation was of significant difference. It's inferred that the earnings pre-annunciation provided additional information to investors and influence their decision-making. But earnings pre-annunciation revision didn't transfer more accurate information to market.According to the conclusions, the author considered:①The Securities Regulatory Commission defines the accuracy of IPO's earnings forecasts in specific percentage scope, but it is difficult to improve the decision-making usefulness of the earnings forecasts fundamentally. To take the reliability and pertinence of accounting information into consideration synchronously is still an important subject ahead of us.②The voluntary disclosure principle of IPO's earnings forecasts is propitious to the listed companies to choose whether to disclose earnings forecasts according to their needs and ability, and it is helpful to improve the accuracy of the earnings forecasts. At the same time, it helps investors to identify the strength and prospects of listed companies in accordance with the disclosure behavior. To this end, we should adhere to the voluntary disclosure principle.③Earnings pre-annunciation system enhanced the transparence and timeliness of information disclosure, so it is conducive to the stability of the securities market.④Investors aren't capable of judging and distinguishing the accuracy of the earnings forecasts. Therefore, we must try our best to improve the accuracy of the earnings forecasts and to provide information related with decision-making in the process of implementing earnings pre-annunciation system.⑤In order to provide investors with more accurate earnings information and to ensure the seriousness and impartiality of earnings pre-annunciation, securities regulatory departments should monitor listed companies'earnings pre-annunciation revision effectively.⑥The design of information disclosure system will have a tremendous impact on the information content of earnings forecasts. Through consummating the disclosure system and improving the implementation mechanism, investors can get reliable and relevant earnings forecasts information.Because of the problems existing in the implementation process of IPO's earnings forecasts disclose system and earnings pre-annunciation system, we try to make some policy recommendations:①The "safety harbor" system should be established;②We should improve enforcement mechanisms of the earnings forecasts disclosure system as well as strengthening and improving the earnings forecasts disclosure system;③We should make more specific provisions of the disclosure content to meet the investors'decision-making;④A mature market of professional financial analysts must be gradually established to cultivate a number of high-quality financial analysts;⑤A number of professional assessment institutions must be set up to evaluate management earnings forecast and earnings pre-annunciation.In this study, the innovation included:①The paper newly defined the connotation and extension of management earnings forecasts. Through analyzing the commonness and characteristic of earnings forecasts and earnings pre-annunciation performance, the author found their superposition,namely information which has the quality of forecast.②The author comprehensively analyzed the development process of IPO's earnings forecasts disclosure system and earnings pre-annunciation system, and summed up four features emerged in the changing course of IPO's earnings forecasts disclosure system and six characteristics of earnings pre-annunciation system.③In accordance with the understanding of the information content of earnings forecasts, through theoretical analysis and experiential verifying, the paper came to the conclusions that management earnings forecasts have information content. In addition, the author tried her best to select the recent data as the sample.④The paper pointed out the status quo,harm and causes of earnings pre-annunciation revision, and collected relevant data to test its market effects. Finally it is proved that earnings pre-annunciation revision hadn't increased the information content of the earnings pre-annunciation.