Level of Business Insights in the MD&A and Nonprofessional Investors’ Judgments

Abstract

This study examines how the level of business insights in a firm’s MD&A interacts with its current financial performance to influence nonprofessional investors’ judgments. Following the observations and guidance of the ASIC and SEC to define low-and high-insight MD&A, this study finds that low-insight MD&A, when provided for a negative earnings surprise, increases investors’ judgments of the negative earnings persistence and hurts management reputation more than if no MD&A had been provided. High-insight MD&A, when including a plausible external attribution, increases investors’ judgments of management reputation in the negative earnings surprise condition and decreases investors’ judgments of positive earnings persistence.

Keywords: Level of business insights; MD&A quality; Financial performance; Nonprofessional investors; Experiment

JEL Classification: M41