Commencing on 13 March 2000, the Corporate Law Economic Reform Program Act 1999 (Cth) introduced a number of important changes to the regulation of corporate fundraising in Australia. In particular, the Act effected a reduction in the litigation risk associated with Initial Public Offering (IPO) prospectus disclosure, by amending legislative provisions governing liability for inadequate disclosure, and by limiting the oversight role of the securities market regulator, the Australian Securities and Investments Commission. This paper examines the impact of those changes on one aspect of IPO prospectus disclosure, management earnings forecasts.
The paper concludes that the change in litigation risk has reduced the frequency with which forecasts are included in IPO prospectuses, and increased the value relevance of such forecasts. However, it does not provide evidence of any change in the extent of forecast error or bias. These results confirm the findings of previous studies relating to litigation risk, suggesting that its impact is limited to the level, rather than the quality, of disclosure (Johnson, Kasznik and Nelson, 2001; McConomy, 1998; Brown, Taylor and Walter, 1998). The results also suggest that in large part, the objectives of the reforms, which were to reduce the costs of fundraising while improving investor protection, have been achieved.