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

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  • STEPHEN V. BROWN
  • JENNIFER WU TUCKER

Abstract

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.

Suggested Citation

  • Stephen V. Brown & Jennifer Wu Tucker, 2011. "Large‐Sample Evidence on Firms’ Year‐over‐Year MD&A Modifications," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 49(2), pages 309-346, May.
    • Handle: RePEc:bla:joares:v:49:y:2011:i:2:p:309-346
    DOI: 10.1111/j.1475-679X.2010.00396.x
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