Disclosure Informativeness, Business Change and Earnings Quality
Meta Heuristica, LLC
University of Maryland - Department of Finance
University of Maryland - Robert H. Smith School of Business
August 20, 2014
We use highly granular computational linguistics to assess the content of the MD&A section of the 10-K as a whole. We find that this content is more informative when the financial statements are less informative, and vice-a-versa. MD&A disclosures are especially informative during periods of business change and when earnings quality is low. Novel tests to reveal underlying mechanisms identify several common informative disclosures, which can be measured in a standardized way for each firm-year. They are difficult for financial statements 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, industry shocks, and the position of individual firms relative to industry peers.
Number of Pages in PDF File: 55
Keywords: Valuation, 10-K, MD&A, Disclosure, Informativenesss, Text Analytics, Latent Dirichlet Allocation, Signaling
JEL Classification: G31, G38, G39, M40, M41working papers series
Date posted: May 4, 2013 ; Last revised: August 29, 2014
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