We discuss new developments in Natural Language Processing (NLP) and how they can be applied to perform textual analysis in accounting research.
Bochkay, K., S. V. Brown, A. J. Leone, and J. W. Tucker. 2022. Textual Analysis in Accounting: What’s Next? Contemporary Accounting Research. Forthcoming.
We look at how companies use the narrative MD&A in the annual report to compensate for financial statements have relatively lower information contained in the quantitative numbers themselves.
Brown, S. V., L. Hinson, and J. W. Tucker. 2021. Financial Statement Adequacy and Firms’ MD&A Disclosures. Working Paper.
Companies change their risk factor disclosures after other leaders and peers in the industry receive a comment letter, even though the original company did not receive a letter itself. Not only does this spillover effect influence how much companies change their disclosures, but it also increases the amount of company-specific information they disclose. It also seems to improve overall disclosure quality.
Brown, S. V., X. Tian, and J. W. Tucker. 2018. The Spillover Effect of SEC Comment Letters on Qualitative Corporate Disclosure: Evidence from the Risk Factor Disclosure. Contemporary Accounting Research. 35 (2): 622-656.
When clients don't fit as well with their auditors, they're more likely to switch to one with a better fit. Using textual disclosure similarity to assess auditor-client fit, after an auditor change there is a quick alignment in the footnotes of that client with existing clients of the new auditor, followed by slower changes in unaudited sections of the 10-K.
Brown, S. V. and W. R. Knechel. 2016. Auditor-Client Compatibility and Audit Firm Selection. Journal of Accounting Research. 54 (3): 725-775.
We measure year-over-year changes in companies' 10-K MD&A disclosures, confirming these changes are more likely to appear following larger operational changes, but finding a decline in the magnitude of these changes and the stock market's reaction to them. This latter result may indicate a decline in the usefulness of the MD&A for investors, coincident with the MD&A disclosures becoming longer and more boilerplate over time. We find no evidence that sell-side analysts use the MD&A in adjusting their forecasts, possibly due to having superior information sources.
Brown, S. V. and J. Tucker. 2011. Large-Sample Evidence on Firms' Year-Over-Year MD&A Modifications. Journal of Accounting Research. 49 (2): 309-346.