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Executive Summary: 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.
Abstract: The Securities and Exchange Commission (SEC) has expressed concern about the informativeness of firms' Management Discussion and Analysis (MD&A) disclosure. A firm's MD&A is potentially uninformative if it does not change appreciably from the previous year after significant economic changes at the firm. We introduce a measure for narrative disclosure-the degree to which the MD&A differs from the previous disclosure-and provide three findings on the usefulness of MD&A disclosure. First, firms with larger recent economic changes modify the MD&A more than those with smaller economic changes. Second, the magnitude of stock price responses to 10-K filings is positively associated with the MD&A modification score, but analyst earnings forecast revisions are unassociated with the score, suggesting that investors-but not analysts-use MD&A information. Finally, MD&A modification scores have declined in the past decade even as MD&A disclosures have become longer; the price reaction to MD&A modification scores has also weakened, suggesting a decline in MD&A usefulness.
Citation: 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.
DOI: 10.1111/j.1475-679X.2010.00396.x