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
October 5, 2014
We use highly granular computational linguistics to assess the MD&A section of the 10-K as a whole. We find that this text is more value relevant when the earnings are less value relevant, and vice-a-versa. MD&A disclosures are especially relevant during periods of business change and when absolute unexplained accruals are high. Novel tests to reveal underlying mechanisms identify several common disclosures, which can be measured in a standardized way for each firm-year. These disclosures are difficult for numerical financial measures to assess and include: investment projects, product introductions, market conditions, marketing, growth strategies, and financial market liquidity. Our results suggest that many discretionary accruals are likely driven by the limited ability of accrual models to account for business change and industry shocks.
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: October 6, 2014
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