Financial Statement Adequacy and Firms’ MD&A Disclosures

53 Pages Posted: 24 Jul 2021

See all articles by Stephen V. Brown

Stephen V. Brown

University of Connecticut - Department of Accounting

Lisa A. Hinson

University of Florida - Warrington College of Business Administration

Jenny Wu Tucker

University of Florida - Warrington College of Business

Date Written: July 1, 2021

Abstract

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 proxy for the adequacy of the financial statement channel by the value relevance of book value and earnings. We use several approaches to extract MD&A disclosure attributes: (1) keyword searches to identify non-GAAP disclosure, (2) supervised deep learning models to identify forward-looking statements, and (3) unsupervised topic models as well as text segmentation techniques to identify topics and topic locations. We find that firms with lower value relevance of financial statements (1) are more likely to provide non-GAAP disclosure in the MD&A, (2) include more forward-looking statements in the MD&A, and (3) use larger proportions of the MD&A to discuss intangibles and discuss them more prominently. Our findings suggest that managers use the MD&A, a relatively more flexible channel, to a greater extent 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

Brown, Stephen V. and Hinson, Lisa A. and Tucker, Jenny Wu, Financial Statement Adequacy and Firms’ MD&A Disclosures (July 1, 2021). Available at SSRN: https://ssrn.com/abstract=3891572 or http://dx.doi.org/10.2139/ssrn.3891572

Stephen V. Brown

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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

Lisa A. Hinson

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

Jenny Wu Tucker (Contact Author)

University of Florida - Warrington College of Business ( email )

Gainesville, FL 32611
United States
352-273-0214 (Phone)
352-392-7962 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
350
Abstract Views
1,042
rank
123,387
PlumX Metrics