Do Attributes of Management’s Explanations of Financial Performance Matter for Analysts? An International Perspective

Aerts and Tarca (2010) study attributes of performance explanations in management commentary reports provided by 172 companies from five industries in the USA, Canada, the UK and Australia. They report that, compared to their counterparts in the UK and Australia, companies from the USA and Canada are generally less assertive and less defensive in explicit causal framing of accounting outcomes. They are also more extensive and formal in their explanations, relying more heavily on accounting-technical language in explaining performance outcomes. We investigate whether these differential attributional properties have economic relevance by considering their relationship with analyst forecast dispersion. Using a factor analysis based on firm-level characteristics of explanatory statements for 158 companies included in the above study, we find that defensiveness and extensiveness of performance explanations are negatively associated with analyst forecast dispersion, while assertiveness and formality are not. Our results suggest that analysts benefit from more detailed explanations and that they pick up defensive explanations while possibly disregarding more assertive explanations. Not surprisingly, the use of more technical-accounting explanations does not serve to reduce dispersion in forecasts. Our study brings together two strands of literature, being studies of explanatory patterns in narrative reports and studies investigating usefulness of narrative reports for analysts.