Financial Statement Adequacy and Firms’ MD&A Disclosures
63 Pages Posted: 24 Jul 2021 Last revised: 22 Nov 2022
Date Written: November 20, 2022
Firms are required to provide financial information via the financial statements and the MD&A—a narrative explanation of the financial statements. Our study examines how firms use the MD&A channel when their financial statement channel is inadequate. We focus on two textual attributes of the MD&A—non-GAAP disclosure and forward-looking statements. We find that firms with less adequate financial statements are more likely to provide non-GAAP disclosure and provide more non-GAAP disclosure in the MD&A. Firms with less adequate financial statements also provide a larger number of forward-looking statements. Using topic analysis, we identify the topics, and therefore the context, in which non-GAAP and forward-looking disclosures are provided. In addition, we examine how firms use the mix of non-GAAP and forward-looking disclosures when the financial statement channel is inadequate. Our study provides evidence on how managers use the MD&A, a relatively more flexible channel, to provide information when their financial statement channel is less adequate.
Keywords: deep learning, machine learning, topic analysis, text segmentation, disclosure.
JEL Classification: D82, G21
Suggested Citation: Suggested Citation