Forward-Looking MD&A Disclosures and the Information Environment

Abstract

We use computer-intensive techniques to study the informational properties of forward-looking disclosures in the MD&A sections of 10-K filings made with the SEC. We find that firms make more forward-looking MD&A disclosures when their stock prices have lower informational efficiency, i.e., when their stock prices poorly reflect future earnings information. The greater levels of forward-looking MD&A disclosures help improve but are unable to completely mitigate the lower informational efficiency of stock prices for such firms. These findings are stronger for operations-related forward-looking disclosures, disclosures that are made prior to 2000, and disclosures made by loss firms.

Corporate Social Responsibility Report Narratives and Analyst Forecast Accuracy

“…Hussainey et al (2003), Schleicher et al (2007), and Hussainey and Walker (2009) show that forward-looking MD&A disclosures in the U.K. are informative. Muslu et al (2015) find that short-horizon MD&A disclosures help investors incorporate information on future performance into stock prices.…”

“…Beyer et al (2010, p. 312) suggest that "analyzing disclosures using natural language processing techniques seems most promising in creating meaningful disclosure quality measures for large samples." Prior studies that use computer linguistic techniques find that various aspects of financial statement narratives such as pessimism, readability, length, numerical content, and horizon content are informative to users and/or associated with future performance (Li 2010a(Li , 2010bMuslu et al 2015). Capitalizing on these findings, we rank CSR reports higher if they include fewer optimistic and more pessimistic keywords; if they are easily readable; if they are longer; and if they have more numerical and horizon content.…”

The Forward-Looking Disclosures of Corporate Managers: Theory and Evidence

“…Karapandza (2013) shows that the stocks of firms whose managers make only few promises in their 10-K reports feature positive abnormal returns, and provides evidence that this is due to a risk-premium demanded by investors. Muslu et al (2014) construct an index which captures the quantity of forward-looking disclosures in a firm's 10-K report, and find that the managers of firms with poor information environments make more forward-looking disclosures.…”

Automatic Prediction of Future Business Conditions

“…Various and wide studies were conducted with the aim of extracting information from earning calls [6] and, recently, it has been proved that the most significant part of information that can be derived from those earning call documents can be obtained by analyzing the tones of small subset of sentences that mainly talk about future business plans: the so-called forward-looking statements [4,5].…”

“…In areas where better forecasting can result in substantial profits, like stock trading, the monitoring and analysis of digital data streams [1][2][3] is gaining momentum. Recent works in accounting and finance demonstrate that both the quantitative data as well as the narrative/qualitative information enclosed in corporate filings (e.g., 10-K) and earning call transcripts can be successfully exploited to predict both short term firm-specific performance and future macroeconomics fluctuations [1,2,[4][5][6]]. …”