Management’s tone change, post earnings announcement drift and accruals

Abstract

This study explores whether the management discussion and analysis (MD&A) section of Forms 10-Q and 10-K has incremental information content beyond financial measures such as earnings surprises and accruals. It uses a classification scheme of words into positive and negative categories to measure the tone change in the MD&A section relative to prior periodic SEC filings. Our results indicate that short window market reactions around the SEC filing are significantly associated with the tone change of the MD&A section, even after controlling for accruals and earnings surprises. We show that management's tone change adds significantly to portfolio drift returns in the window of 2 days after the SEC filing date through 1 day after the subsequent quarter's preliminary earnings announcement, beyond financial information conveyed by accruals and earnings surprises. The drift returns are affected by the ability of the tone change signals to help predict the subsequent quarter's earnings surprise but cannot be completely attributed to this ability. We also find that the incremental information of management's tone change depends on the strength of the firm's information environment.

The perceived credibility of forward-looking performance disclosures

“…Recent research relies heavily on computer software packages to measure levels of narratives disclosures. These include Kothari et al (2009), Feldman et al (2010, Brown andTucker (2011), Gruning (2011) and Davis and Tama-Sweet (2012). For an extensive review of the use of computer-based content analysis to measure levels of disclosure, see Li (2010b).…”

Monetary Policy Uncertainty

“…These include cyclones (Rita, Katrina), tornadoes, hurricanes, floods, blizzards, snow storms, earthquakes, and heat waves. 32 We expect this also to be positively correlated with monetary policy uncertainty. In this case too, the estimated coefficients are not significant.…”

Contemporaneous verification of language: evidence from management earnings forecasts

“…The null hypothesis in these studies, that language is not incrementally priced, is hardly a straw man, given that language shares several of the key characteristics of cheap talk; notably, it is costless to convey and relatively difficult to verify, even ex post. However, in spite of its propensity to be cheap talk, studies continue to document that language is priced in several situations: earnings announcements Demers and Vega 2014), restatement announcements (Mangen and Durnev 2010), IPO prospectuses (Balakrishnan and Bartov 2010), conference calls (Chen et al 2014), and MD&A and other elements of the 10K reports (Davis and TamaSweet 2012;Feldman et al 2010;Li 2010).…”