Is There Predictive Value In The Words Managers Use? A Key Word Analysis Of The Annual Report's Management Discussion And Analysis.

Abstract

This study examines whether managers use linguistic style (i.e. optimistic and pessimistic tone) in the Management Discussion and Analysis (MD&A) section of the annual report to the SEC, Form 10-K, to provide information about expected future firm performance to the investors and whether market prices (investors) respond to these disclosures. Textual analysis software, Diction 5.0, is used to measure optimistic and pessimistic tone of MD&A for the year 2002 for 423 manufacturing firms. Previous research similar to this study found evidence that managers use linguistic style or tone to reveal information to financial statement users through their textual releases in the President's Letter and in quarterly and annual earnings releases. The statistical models that resulted from my study did not reveal the information link I expected to find between manager's beliefs about their firm's future, as expressed in the language and linguistic tone of their non-quantitative disclosures to the SEC, and actual future firm results. My findings suggest that the SEC has accomplished its stated goal of making the Management Discussion and Analysis a source of reliable information about the firm....a resource free of anything other than dependable, factual information.