The accuracy of earnings forecasts disclosed in the prospectuses of newly formed public companies in Jordan

Abstract

Purpose

This study aims to examine the accuracy of the earnings forecasts (EFs) included in the prospectuses of newly established firms in Jordan.

Design/methodology/approach

Prospectuses of 41 newly formed public companies in Amman stock exchange during the period 1992‐1996 are tested to identify the accuracy of EF and the association between EF and certain firm characteristics. These include auditor's reputation (AUD), retained ownership, plant assets, DE, BVPSH, market value to book value (MV2BV), size and forecast period.

Findings

Findings show that forecasts are optimistic and retained ownership ratio, MV2BV, and the losses in SHPs are associated with forecast errors.

Research limitations/implications

The sample is limited to companies that are required to provide earnings estimates in their prospectuses. Thus holding companies, insurance companies and private firms which went public are excluded from the sample.

Practical implications

Investors are advised to seek other information as the EF are biased.

Originality/value

The paper highlights that Jordanian regulators need to address the inaccuracy of earnings which can give negative signals to local and foreign investors.

Citation

El‐Rajabi, M.T.A. and Gunasekaran, A. (2006), "The accuracy of earnings forecasts disclosed in the prospectuses of newly formed public companies in Jordan", Managerial Auditing Journal, Vol. 21 No. 2, pp. 117-131. https://doi.org/10.1108/02686900610639275