A Study On The Relevance Between IPO Earnings Forecast And Stock Price

Abstract's an emerging market, the stock market in China is in want of improvement in terms of the institution building, practitioners' level and market efficiency, due to the fact that it has a relatively short period of development and a late start compared with that in European countries and America. However, what's worth mentioning is that with the constantly developing and improving Chinese stock market,the gap between it and that in European countries and America is narrowed to some extent. The information disclosure system is closely related t o the development level, the development state and the features of the public company. The information disclosure system is optimized to improve the supervision system of public company, protect the interests of the investors in public companies and adapt to the market economy. It can be said that in 2001, the IPO companies are forced to disclose their earnings forecasts, which are closely related to the stock issuing price. After that, CSRC has issued and which clearly state that the public companies can decide on their own whether to disclose the earnings forecast or not. At the current state of China, the disclosure of earnings forecast can be done voluntarily.To voluntarily disclose IPO earnings forecast is of far-reaching significance not only for the public companies, the investors but also the whole stock market. For IPO companies, voluntarily disclosing earnings forecast can help promote their operation independence, enhance their sense of responsibility for the investors and the society. In addition, conveying the information concerning the companies' potential earning ability to the relevant financial statement users is a manifestation of managers' confidence of the company and can bring down the financing costs. For the investors, earnings forecast are of vital importance to a correct evaluation of companies' potential earning ability and are helpful for consumers to make reasonable economic decisions. Being investors' most important source of information, the earnings forecast voluntarily disclosed by the public companies is conducive to driving down the cost of obtaining information. Thus, the earnings forecast can promote the optimal distribution of resources, decrease the transaction cost of the stock market and improve the efficiency of the stock market. The thesis is both empirical study and a theoretical study of the relationship between the IPO earnings forecast and the stock price. With all the IPO companies listed from March fifteenth,2008 to December 30th as the objects of the research, the thesis, through relevant research and analysis, attempts to find out whether there is relevance between the earnings forecast and the stock price. For the time being, there exist a large number of researches on the subject of voluntary earnings forecast. Most of the scholars' researchers have found out that many public companies are reluctant to disclose earnings forecast after it has been made compulsory. To put it in another way, public companies are not that willing to disclose earnings forecast. However, this decrease of willingness is said in a comparative sense rather than an absolute sense. Most of the research literature focuses on discuss on the reliability of earnings forecast, while only a few of them discuss the relevance between the earnings forecast and the stock price. These few research literature study both compulsory disclosure mechanism and voluntary mechanism due to the considerations of avoiding the effect of new policies upon the capital market. The adaptive phrase for a new system has passed since it has been years when the voluntary disclosure system is practiced in the market. It may be more meaningful and fitting to conduct an independent study of the relevance between the voluntarily-disclosed earnings forecast and the stock price.Most of the scholars tend to agree that there is a earnings forecast and the stock price, while, of course, others tend to disagree. After drawing upon the research literature of different scholars, this thesis, by having a comprehensive discuss, attempts to prove the relevance from two perspectives, namely, the accuracy and quality of earnings forecast. The empirical results of the thesis prove that there is a earnings forecast and the stock price and this correlativity differs with the accuracy and quality of the earnings forecast.