Do changes in MD&A tone predict financial restatements? Evidence from Chinese listed companies

Li Du and Chengmin Tu

Accounting and Finance, 2025, vol. 65, issue 3, 2420-2453

Abstract: We empirically examine whether changes in the Management Discussion and Analysis (MD&A) tone in annual reports can effectively predict financial restatements. The results indicate that changes in MD&A tone are significantly positively correlated with financial restatements; the greater the changes in MD&A tone, the higher the probability of financial restatements. Furthermore, an empirical test shows that the predictive power of MD&A tone changes for financial restatements is relatively stronger when companies (1) face tighter financial constraints, (2) have poorer governance, (3) operate in highly competitive industries and (4) receive a heightened level of external attention. This study not only provides empirical evidence of management tone manipulation based on practices of Chinese companies, but it also marginally expands research on accounting information manipulation.

Date: 2025
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