Corporate Ownership Structure and Accuracy and Bias of Mandatory Earnings Forecast: Evidence from Taiwan

The primary objective of this study is to examine the association between the quality of mandatory earnings forecast, measured by forecast accuracy and bias, and the ownership structure of Taiwanese firms, measured by the divergence between the ultimate owner’s control and the equity ownership level. The study is based on 528 forecasts issued by Taiwanese listed firms from 1999 to 2001 which were affected by the regulation on disclosure of earnings forecasts issued by the Taiwan Securities and Futures Exchange Commission (TSFEC). First, we find that concentrated ownership and the associated pyramidal and cross-holding structures created agency conflicts between controlling owners and outside investors. Second, we also find that firms tend to issue more inaccurate and optimistically biased forecasts in the presence of the greater divergence between the ultimate owner’s control and the equity ownership level. Third, the firms with serious agency problems tended to revise their forecasts more to reduce error or bias or manipulate accruals more (e.g. through discretionary accruals) in order to avoid violating the 20% forecast error threshold as the end of the period approached. Finally, the resulting post-managed forecast error or bias does not significantly vary with the level of ownership concentration