Linguistic tone of management discussion and analysis disclosures and the municipal debt market

Abstract

PurposeAs the management discussion and analysis (MD&A) section contains discretionary narrative disclosures regarding a government's yearly financial changes and status, the authors investigate several municipal debt market consequences of linguistic tone within these disclosures.Design/methodology/approachThe authors textually analyze municipal MD&As with Linguistic Inquiry and Word Count (LIWC) software and develop narrative tone measures based on existing financial-specific dictionaries. Using a final sample of 446 municipal bond issuances from 2012 to 2016, the authors modify the current bond regression models to examine the association between MD&A disclosure tone and future bond interest costs or rating disagreements.FindingsThis study’s empirical analysis suggests that more negative MD&A tone is associated with higher future debt costs and greater future disagreements among bond rating agencies.Practical implicationsOverall, the evidence implies that municipal bond stakeholders use the information in narrative disclosures when evaluating risk, but that the qualitative nature can introduce differences in interpretation between users. Furthermore, additional training in MD&A writing and further standard guidance in MD&A disclosures could improve the MD&A's informativeness for bond market decision-making and state-level monitoring.Originality/valueThis study is first to incorporate narrative tone measures into bond models in a governmental context.

Managerial tone and investors' hedging activities: Evidence from credit default swaps

“…A few studies document that linguistic tone serves as an explanation for the activities in both the equity market and the bond market (D'Augusta & DeAngelis, 2020b; Feldman et al, 2010; Huang, Teoh, & Zhang, 2014; Rich et al, 2021). However, the CDS market is a preferred place for investors to gather useful information relative to the stock market or the bond market for two reasons.…”

Stories and Sentiment in State and Local Government Finance

“…This suggests sentiment can help to predict intraorganizational outcomes like audit findings. More recent work offers initial evidence that among local governments, negative sentiment in the MD&A disclosures can increase future debt issuance costs (Rich, Roberts, and Zhang 2021). Future work should continue to explore these capital markets effects, and explore whether the same is true of budget expansions or cuts, revenue forecast accuracy, revenue volatility or stability, and other key financial outcomes.…”

Community Benefit Report Spending and Content Analysis

“…Li (2010) found that future earnings and liquidity are better when the Management Discussion and Analysis (MD&A) section of the financial statements is more positive. Rich et al (2021) studied the relationship between the tone in the MD&A section of the financial statements and the municipal debt market and found that a more negative tone is associated with higher future debt costs and greater future disagreements among bond rating agencies.…”