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Disclosure, Business Change and Earnings Quality

54 Pages Posted: 4 May 2013 Last revised: 9 Sep 2015

Christopher Ball

Meta Heuristica, LLC

Gerard Hoberg

University of Southern California - Marshall School of Business

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business

Date Written: August 1, 2015

Abstract

We use highly granular computational linguistics to assess the MD&A section of the 10-K as a whole. Our results show that the content of MD&A can be systematically used to explain the valuation of firms, particularly those undergoing business change, where the value relevance of financial statements is comparatively low. An important channel for this improvement is the context provided by MD&A for interpreting discretionary accruals. We find that relevant discussion takes the form of specific topics that explain the nature of business change. These topics include investment strategies, securities issuance, marketing, financial constraints and liquidity, and new agreements. Most specifically, discretionary accruals explained by the MD&A text are not associated with restatements and accounting litigation, whereas unexplained discretionary accruals do predict such misconduct.

Keywords: 10-K, MD&A, Disclosure, Value Relevance, Text Analytics, Latent Dirichlet Allocation, Discretionary Accruals

JEL Classification: G31, G38, G39, M40, M41

Suggested Citation

Ball, Christopher and Hoberg, Gerard and Maksimovic, Vojislav, Disclosure, Business Change and Earnings Quality (August 1, 2015). Available at SSRN: https://ssrn.com/abstract=2260371 or http://dx.doi.org/10.2139/ssrn.2260371

Christopher Ball

Meta Heuristica, LLC ( email )

Fairfax, VA
United States

HOME PAGE: http://www.metaheuristica.com

Gerard Hoberg (Contact Author)

University of Southern California - Marshall School of Business ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~hoberg/

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business ( email )

Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2125 (Phone)
301-314-9157 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/vmax/

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