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

51 Pages Posted: 16 Nov 2008

See all articles by Suresh Govindaraj

Suresh Govindaraj

Rutgers University - Rutgers Business School - Newark and New Brunswick

Benjamin Segal

Fordham University; Hebrew University of Jerusalem

Multiple version iconThere are 2 versions of this paper

Date Written: January 2008

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.

JEL Classification: G12, G14, M41, M45, G38

Suggested Citation

Govindaraj, Suresh and Segal, Benjamin, The Incremental Information Content of Tone Change in Management Discussion and Analysis (January 2008). NYU Working Paper No. JOSHUA LIVNAT-09. Available at SSRN: https://ssrn.com/abstract=1301338

Suresh Govindaraj

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

1 Washington Park
Room #934
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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