Analyzing and Explaining the Forecasting Bias that Occurred on Initial Public Offerings that Took Place in Brazil

Estevao Seccatto Rocha^1, and Anderson Dias Brito¹

¹Department of Business Administration, University of São Paulo, São Paulo, Brazil

Cite this paper:
Estevao Seccatto Rocha and Anderson Dias Brito. Analyzing and Explaining the Forecasting Bias that Occurred on Initial Public Offerings that Took Place in Brazil. Journal of Finance and Economics. 2024; 12(3):53-62. doi: 10.12691/jfe-12-3-2

Abstract

Initial Public Offerings have been a rich field for both academic and market analyses. Often, financial institutions conduct evaluations and projections on the company intending to go public to meet the demand for information from potential investors. Accurate budgeting and indicators are critical for a successful IPO. However, many companies end up with a significant gap between projected values and actual results, constituting projection errors, and the market penalizes newly listed companies for significant underperformance. Our objective is to analyze the discrepancies between the projected numbers obtained during the analysis performed by various Equity Research Companies during the IPO process and the actual numbers performed by the companies in different time-lapses. This study measures the forecast error of the IPO, based on the difference between the indicator forecast and the real indicator. We analyzed EBITDA, revenues and net income in the period between 2004 and 2020. This article uses a quantitative approach to provide greater precision in results on IPO forecast performance. Cross-sectional secondary data was used, including revenue, earnings before interest, taxes, depreciation, and amortization (EBITDA) and net profit of Brazilian companies. The period analyzed was between 2004 and 2020. The results show that Equity Research Companies make error forecasts and make forecasts more optimistic. There are statistical differences between estimated values and real values at a level of 5% for revenue and EBITDA and 1% for net income, both in t test (average difference), and Wilcoxon test (median difference). Based on this, the hypothesis that the analyst makes the forecast more optimistic than the real performance can’t be rejected.

Keywords:
IPO overpricing underpricing

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