Management's Tone Change, Post Earnings Announcement Drift and Accruals
Hebrew University of Jerusalem - Jerusalem School of Business Administration
Rutgers University - Rutgers Business School - Newark and New Brunswick
New York University; Prudential Financial - Quantitative Management Associates
May 11, 2009
This study explores whether the management discussion and analysis (MD&A) section of Forms 10-Q and 10-K has incremental information content beyond financial measures such as earnings surprises and accruals. It uses a classification scheme of words into positive and negative categories to measure the tone change in the MD&A section relative to prior periodic SEC filings. Our results indicate that short window market reactions around the SEC filing are significantly associated with the tone change of the MD&A section, even after controlling for accruals and earnings surprises. We show that management’s tone change adds significantly to portfolio drift returns in the window of two days after the SEC filing date through one day after the subsequent quarter’s preliminary earnings announcement, beyond financial information conveyed by accruals and earnings surprises. The drift returns are affected by the ability of the tone change signals to help predict the subsequent quarter’s earnings surprise but cannot be completely attributed to this ability. We also find that the incremental information of management’s tone change depends on the strength of the firm’s information environment.
Number of Pages in PDF File: 65
Keywords: Textual analysis, earnings drift, accruals, earnings surprises, management tone change, MD&A
JEL Classification: G12, G14, M41
Date posted: October 20, 2008 ; Last revised: July 16, 2009
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