We investigate relations between the textual content of municipal Management Discussion and Analysis (MD&A) disclosures and future financial reporting. Specifically, we examine the linguistic tone of municipal MD&A disclosures and future financial reporting delays as a proxy for financial reporting quality. Using a sample of 362 municipal MD&A disclosures in fiscal year-end 2011, our empirical analysis suggests that the fraction of positive to total words in municipal MD&A disclosures is associated with timelier financial reporting in the following year after controlling for current report timing and other municipality and governance factors. We interpret our results to suggest that positive language in municipal MD&A disclosures is a signal of confidence in financial reporting quality, indicating that MD&A text contains relevant information in forecasting the quality of future financial reporting for local governments.
JEL Classifications: G34; H55; H72.
We study the textual content of MD&A disclosures. Specifically, we model the determinants of linguistic tone (based on the fraction of positive or negative words) in municipal MD&A sections and test for associations with the reporting of future internal control weaknesses. Our evidence suggests that factors such as high unemployment, general fund deficits, and less funding from higher levels of government are associated with negative tone, based on a sample of 362 MD&A disclosures in fiscal year 2011. Our internal control analysis is consistent with positive (negative) tone in municipal MD&A disclosures being associated with fewer (more) subsequent-year internal control weaknesses after controlling for other governance, demographic, and performance factors. Our analysis also suggests that positive tone is associated with a lower probability of future general fund deficits. Our findings suggest that municipal MD&A content contains important information regarding the quality of future municipal financial reporting through internal control quality.
JEL Classifications: H83.
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.
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