Financial Performance Explanations and Institutional Setting

Abstract

The aim of this study is to investigate whether country differences in the institutional setting for financial reporting affect the attributes of managers’ explanations of performance in management commentary reports. We include 172 listed companies from five industries (building materials, food processors, pharmaceuticals, biotechnology and retail) in the United Kingdom, Australia, the USA and Canada in 2003. We find significant country differences in attributional properties of performance explanations in management commentary reports. The US and Canadian companies are generally less assertive and less defensive in causal explanations offered compared to their counterparts in the UK and Australia. The North American companies are also more extensive and formal in their explanations, relying more heavily on technical-accounting language. These tendencies are most pronounced in the USA, where the aggregate of private and public enforcement is greatest. Taken together, our evidence suggests that higher expected regulatory and litigation costs induce a more elaborative, but risk-averse explanatory stance that may well reduce the overall incremental value of the explanations offered.

Keywords: Management discussion and analysis (MD&A), Operating and Financial Review (OFR), regulation, enforcement, litigation, attributional statements

JEL Classification: M41, K22