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Manager sentiment and its effect on corporate innovation

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  • Xiong, Xun
  • Zhao, Long

Abstract

Identifying the factors that predict managers’ commitment to innovation is crucial for understanding firm growth and competitiveness. However, the impact of the textual tone in financial reports on corporate innovation is relatively understudied. This study investigates whether manager sentiment, captured through the textual tone in the Management Discussion and Analysis (MD&A) section of annual financial statements, helps predict firm innovation. Using data from China’s listed firms during 2003–2017, we provide robust evidence that manager sentiment is positively associated with corporate innovation, particularly for firms with low growth, low liquidity, low profitability, high distress, and state-owned enterprises. Our analysis shows that this relationship operates through increased institutional ownership, reduced capital costs, and improved access to external financing. These findings highlight the value of MD&A textual tone as a tool for stakeholders to assess a firm’s future innovation potential and competitiveness.

Suggested Citation

  • Xiong, Xun & Zhao, Long, 2025. "Manager sentiment and its effect on corporate innovation," Economic Modelling, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:ecmode:v:143:y:2025:i:c:s0264999324003250
    DOI: 10.1016/j.econmod.2024.106968
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    Keywords

    MD&A; Corporate innovation; Manager sentiment; Textual analysis;
    All these keywords.

    JEL classification:

    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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