Disclosure, Business Change and Earnings Quality
Meta Heuristica, LLC
University of Southern California - Marshall School of Business
University of Maryland - Robert H. Smith School of Business
August 1, 2015
We use highly granular computational linguistics to assess the MD&A section of the 10-K as a whole. Our results show that the content of MD&A can be systematically used to explain the valuation of firms, particularly those undergoing business change, where the value relevance of financial statements is comparatively low. An important channel for this improvement is the context provided by MD&A for interpreting discretionary accruals. We find that relevant discussion takes the form of specific topics that explain the nature of business change. These topics include investment strategies, securities issuance, marketing, financial constraints and liquidity, and new agreements. Most specifically, discretionary accruals explained by the MD&A text are not associated with restatements and accounting litigation, whereas unexplained discretionary accruals do predict such misconduct.
Number of Pages in PDF File: 54
Keywords: 10-K, MD&A, Disclosure, Value Relevance, Text Analytics, Latent Dirichlet Allocation, Discretionary Accruals
JEL Classification: G31, G38, G39, M40, M41
Date posted: May 4, 2013 ; Last revised: September 9, 2015
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