Forward-Looking Md&A Disclosures and Market Efficiency(3/3)

Project Details

Description

This project extends prior research on the information content of qualitative MD&A disclosures in 10-K filings by examining whether they attenuate the post-earnings announcement drift and accrual anomaly. The first-year project argues that the forward-looking MD&A disclosures reduce information uncertainty and thus facilitate investors' and analysts' responses to previous earnings surprises. The more verifiable the forward-looking MD&A disclosures, the stronger their effects on reducing both investor and analyst underreaction to previous announced earnings will be. The second-year and the third-year projects suggest that managers have two major motivations to record discretionary accruals, namely, opportunistic purposes and signaling purposes. Thus, discretionary accruals are decomposed into signaling-driven and opportunistic-driven discretionary accruals. The second-year project argues that managers with signaling (opportunistic) motivations are more (less) likely to engage in forward-looking and Critical Accounting Policies disclosures, with a less (greater) amount of estimation in accruals. It is argued that these disclosures in the MD&A section of 10-K filings arising from managers' two major motivations will help inform investors of the persistence of both signaling-driven and opportunistic-driven discretionary accruals and thus attenuate the mispricing of signaling-driven (opportunistic-driven) discretionary accruals and total discretionary accruals. The third-year project argues that managers with signaling motivations to record discretionary accruals credibly use forward-looking disclosure tone in MD&A disclosures in conjunction with discretionary accruals to convey their private information of future prospects, whereas managers with opportunistic motivations to record discretionary accruals are less likely to disclose pseudo forward-looking tone to mislead investors for fear of potential litigation risk. Every sentence in the forward-looking MD&A disclosure is classified into one of four tones: optimistic, neutral, pessimistic, or uncertain, while net optimistic forward-looking tone is defined as the difference between the optimistic words and the pessimistic words scaled by total number of words in the MD&A disclosures. Holding information uncertainty constant, it is posited that signaling-type managers are more likely to disclose optimistic (pessimistic) forward-looking tone when facing income-increasing (income-decreasing) discretionary accruals, while net optimistic forward-looking tone is not related to opportunistic-driven discretionary accruals. In addition, the positive association between signaling-driven discretionary accruals and net optimistic forward-looking tone is more pronounced when facing lower information uncertainty. Furthermore, it is posited that signaling-type managers may choose either a confirmatory or non-confirmatory forward-looking tone depending on the extent of information uncertainty. The confirmatory (non-confirmatory) forward-looking tone means that the net optimistic forward-looking tone is in the same (opposite) direction as the signs of the signaling-driven discretionary accruals. It is posited that a confirmatory forward-looking tone helps inform investors of the two major motivations for recording discretionary accruals thereby attenuating the mispricing of signaling-driven (opportunistic-driven) discretionary accruals and total discretionary accruals, while non-confirmatory forward-looking tone is unable to attenuate these accrual anomalies.
StatusActive
Effective start/end date1/08/2131/07/22

UN Sustainable Development Goals

In 2015, UN member states agreed to 17 global Sustainable Development Goals (SDGs) to end poverty, protect the planet and ensure prosperity for all. This project contributes towards the following SDG(s):

  • SDG 9 - Industry, Innovation, and Infrastructure
  • SDG 16 - Peace, Justice and Strong Institutions
  • SDG 17 - Partnerships for the Goals

Keywords

  • accrual mispricing
  • Critical Accounting Policies disclosures
  • forward-looking disclosures
  • forward-looking disclosure tone
  • discretionary accruals
  • investor and analyst underreaction to earnings surprises
  • MD&A disclosures
  • opportunistic-driven discretio

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