The Incremental Information Content of Tone Change in Management Discussion and Analysis

51 Pages Posted: 30 Apr 2008

See all articles by Ronen Feldman

Ronen Feldman

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Suresh Govindaraj

Rutgers University - Rutgers Business School - Newark and New Brunswick

Joshua Livnat

New York University; Prudential Financial - Quantitative Management Associates

Benjamin Segal

Fordham University; Hebrew University of Jerusalem

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Abstract

This study explores whether the Management Discussion and Analysis (MD&A) section of Form 10-Q and 10-K has incremental information content beyond financial measures such as earnings surprises, accruals and operating cash flows (OCF). It uses a well-established classification scheme of words into positive and negative categories to measure the tone change in a specific MD&A section as compared to those of the prior four filings. Our results indicate that short window market reactions around the SEC filing are significantly associated with the tone of the MD&A section, even after controlling for accruals, OCF and earnings surprises. We also show that the tone of the MD&A section 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, OCF and earnings surprises. The incremental information of tone change is larger the weaker is the firm's information environment.

Keywords: Tone, SEC filings, MD&A, Earnings surprises, Accruals

JEL Classification: M41, G14

Suggested Citation

Feldman, Ronen and Govindaraj, Suresh and Livnat, Joshua and Segal, Benjamin, The Incremental Information Content of Tone Change in Management Discussion and Analysis. Available at SSRN: https://ssrn.com/abstract=1126962 or http://dx.doi.org/10.2139/ssrn.1126962

Ronen Feldman

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

Suresh Govindaraj

Rutgers University - Rutgers Business School - Newark and New Brunswick ( email )

1 Washington Park
Room #934
Newark, NJ 07102
United States

Joshua Livnat

New York University ( email )

44 West 4th Street, Suite 10-76
Stern School of Business
New York, NY 10012-1118
United States
212-998-0022 (Phone)
212-995-4004 (Fax)

Prudential Financial - Quantitative Management Associates ( email )

2 Gateway Center
6th Fl.
Newark, NJ 07102
United States

Benjamin Segal

Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States

Hebrew University of Jerusalem

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