Management’s tone change, post earnings announcement drift and accruals

Ronen Feldman (), Suresh Govindaraj (), Joshua Livnat () and Benjamin Segal ()
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Ronen Feldman: Hebrew University
Suresh Govindaraj: Rutgers Business School, Newark and New Brunswick, Department of Accounting, Business Ethics, and Information Systems
Joshua Livnat: New York University
Benjamin Segal: INSEAD, Boulevard de Constance

Review of Accounting Studies, 2010, vol. 15, issue 4, No 7, 915-953

Abstract: Abstract This study explores whether the management discussion and analysis (MD&A) section of Forms 10-Q and 10-K has incremental information content beyond financial measures such as earnings surprises and accruals. It uses a classification scheme of words into positive and negative categories to measure the tone change in the MD&A section relative to prior periodic SEC filings. Our results indicate that short window market reactions around the SEC filing are significantly associated with the tone change of the MD&A section, even after controlling for accruals and earnings surprises. We show that management’s tone change adds significantly to portfolio drift returns in the window of 2 days after the SEC filing date through 1 day after the subsequent quarter’s preliminary earnings announcement, beyond financial information conveyed by accruals and earnings surprises. The drift returns are affected by the ability of the tone change signals to help predict the subsequent quarter’s earnings surprise but cannot be completely attributed to this ability. We also find that the incremental information of management’s tone change depends on the strength of the firm’s information environment.

Keywords: Textual analysis; Earnings drift; Accruals; Earnings surprises; Management tone change; MD&A; G12; G14; M41 (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1007/s11142-009-9111-x

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