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Large-Sample Evidence on Firms’ Year-over-Year MD&A Modifications


  • We thank Ray Ball, Brian Bratten, Monika Causholli, Alan Cooke, Gus De Franco, Vicki Dickinson, Michael Donohoe, Ann Gaeremynck, Doug Hanna, Carlos Jiménez, Marcus Kirk, Feng Li, Joshua Livnat, Bill Mayew, Volkan Muslu, Karen Nelson, David Reppenhagen, Eddie Riedl, Sergei Shabanov, Doug Skinner (the editor), Ram Venkataraman, an anonymous referee, and participants at the University of Florida, University of Maastricht, Southern Methodist University, New York University, and University of Kentucky accounting workshops, the 2009 FEA Conference, the 2010 Journal of Accounting Research Conference, and the 2010 AAA Annual Conference. We thank Lan Su for able research assistance. Jenny Tucker thanks the Luciano Prida, Sr. Term Professorship Foundation for financial support.

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The Securities and Exchange Commission (SEC) has expressed concern about the informativeness of firms’ Management Discussion and Analysis (MD&A) disclosures. 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 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.