The spillover effects of MD&A disclosures for real investment: The role of industry competition

Abstract

We explore whether disclosures in the Management Discussion & Analysis (MD&A) have spillover effects for investment and investment efficiency, and whether spillover effects vary with competition. We focus on the tone of MD&A disclosures and document that the association between a company's investments and the tone of its rivals' MD&A disclosures is positive. Moreover, this association is moderated by competition; it is stronger when firms operate in industries that have lower entry costs, are larger, and have less substitutable products. We obtain similar results for investment efficiency. Overall, our evidence suggests that MD&A disclosures have spillover effects for investment that can improve investment efficiency, and that spillover effects are moderated by industry competition.

Interorganizational Spillover: A Review and a Proposal for Future Research

“…Fearing they will be left behind competitively, peer firms increase their capital expenditures when focal firms materially inflate their earnings (Beatty et al, 2013). Likewise, peer firms may perceive the tone of rivals’ management discussion and analysis disclosures as an opportunity for themselves and may increase their investment efficiency accordingly (Durnev & Mangen, 2020).…”

Smoke and Mirrors? Disclosures in the Marijuana Industry in Canada

“…Proprietary costs represent costs that LPs incur, in terms of sales foregone, when they disclose information (e.g., about their physical investments) to rivals (Raith, 1996). Disclosures can encourage a firm's potential rivals to enter its industry or existing rivals to expand operations, which could divert its customers (Durnev and Mangen, 2020). Its disclosures can also reveal that it lacks the financial strength to defend itself against predation from rivals that lower prices to attract its customers (Bernard, 2016).…”

“…A desire to mitigate proprietary costs may lead LPs to be selective in their disclosures (e.g., about the risks associated with marijuana operations). Research cautions that firms withhold information and make fewer disclosures when they operate in industries with highly substitutable products, which is the case in the marijuana industry (Bernard, 2016;Durnev and Mangen, 2020;Raith, 1996). Related firms in competitive industries manage their earnings (Datta, Iskandar-Datta, and Singh, 2013;Markarian and Santalo, 2014).…”

“…For now, we do not know how proprietary costs influence LPs' disclosures. Are their disclosures influenced by competition fundamentals that characterize the marijuana industry, in particular-fairly elevated entry costs, a large product market size, and high product substitutability (Durnev and Mangen, 2020)? Do disclosures vary with changes in entry costs to the industry (i.e., the legalization of recreational marijuana can be seen as a shock that changed entry costs), and with the development and marketization of products that are close substitutes for an LP's products?…”

“…Second, our case study illustrates that textual disclosures feature heavily in LPs' interim reports (e.g., disclosures about legal, health, and safety risks). Research on textual information in annual reports shows how it can be informative about future earnings, cash flows, and investments (Ball, Hoberg, and Maksimovic, 2015;Durnev and Mangen, 2020;Dyer, Lang, and Stice-Lawrence, 2017;Frankel, Jennings, and Lee, 2016). Does the informativeness of textual disclosures translate to interim reports?…”