Management's Tone Change, Post Earnings Announcement Drift and Accruals

65 Pages Posted: 20 Oct 2008 Last revised: 16 Jul 2009

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

Date Written: May 11, 2009

Abstract

This study explores whether the management discussion and analysis (MD&A) section of Forms 10-Q and 10-K has incremental information content beyond financial measures such as earnings surprises and accruals. It uses a classification scheme of words into positive and negative categories to measure the tone change in the MD&A section relative to prior periodic SEC filings. Our results indicate that short window market reactions around the SEC filing are significantly associated with the tone change of the MD&A section, even after controlling for accruals and earnings surprises. We show that management’s tone change 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 and earnings surprises. The drift returns are affected by the ability of the tone change signals to help predict the subsequent quarter’s earnings surprise but cannot be completely attributed to this ability. We also find that the incremental information of management’s tone change depends on the strength of the firm’s information environment.

Keywords: Textual analysis, earnings drift, accruals, earnings surprises, management tone change, MD&A

JEL Classification: G12, G14, M41

Suggested Citation

Feldman, Ronen and Govindaraj , Suresh and Livnat, Joshua and Segal, Benjamin, Management's Tone Change, Post Earnings Announcement Drift and Accruals (May 11, 2009). Available at SSRN: https://ssrn.com/abstract=1287083 or http://dx.doi.org/10.2139/ssrn.1287083

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 (Contact Author)

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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