How Do Firms Change Investments Based on MD&A Disclosures of Peer Firms?

Abstract

We show that a firm’s one-year-ahead capital investments and inventory increase (decrease) when peer firms’ MD&A narratives become more optimistic (pessimistic). This finding is driven by firms that access peer firms’ 10-K filings within seven days of filing, and remains after controlling for other determinants of a firm’s investments as well as economic connections between the firm and peer firms. Moreover, a firm’s investment response varies according to content in peer firms’ MD&A narratives. For instance, a firm makes more (less) capital investments when peer firms become more optimistic in their industry/investment-related (competition-related) narratives. Our findings provide broad insights on the information content and proprietary costs of MD&A disclosures.

Keywords: Peer effects, 10-K filings, management discussion and analysis, textual analysis

JEL Classification: L1, D25