Rev Quant Finan Acc (2006) 26: 275–299
Earnings forecast disclosure regulation and earnings
management: evidence from Taiwan IPO ﬁrms
Bikki Jaggi* · Chen-lung Chin ·
Hsiou-wei William Lin · Picheng Lee
Springer Science + Business Media, Inc. 2006
Abstract This study examines whether the Taiwanese regulation requiring disclosure of
earnings forecasts in the IPOs resulted in disclosure of more optimistic earnings forecasts
and whether the forecast error was reduced more by manipulating the reported earnings rather
than revising the earnings forecasts to meet the forecast error threshold. The study is based
on 759 forecasts issued by the Taiwanese IPO ﬁrms from 1994 to 2001, i.e. 8-year period
after the regulation was modiﬁed to increase the forecast error threshold to 20%.
The ﬁndings show that the disclosure regulation resulted in more optimistic forecasts than
conservative forecasts, especially for ﬁrms expecting better performance in the forecast year
compared to the previous year. Firms disclosing optimistic earnings forecasts engaged more
in manipulation of reported earnings than revision of forecasts to meet the forecast error
threshold. These ﬁndings thus suggest that the disclosure regulation resulted in earnings
manipulation, which reduced the quality of reported earnings.
B. Jaggi (
Faculty of Management School of Business, Rutgers University,
New Brunswick Piscataway, NJ 08854
Tel: (732) 445-3539
Department of Accounting, National Cheng Chi University, Taipei, Taiwan
H.-W. W. Lin
Department and Graduate Institute of International Business, National Taiwan University, Taipei,
Department of Accounting, Lubin School of Business, Pace University, New York, NY 10038
*We received valuable comments at the 2003 American Accounting Association and 2004 Euorpean
Accounting Association annual meetings. We also thank the participants at the research seminars at
Rutgers University, City University of Hong Kong, and Pace University, for their insightful comments.
Picheng Lee especially thanks Pace University for 2003 summer research grant.