Management discussion and analysis: a tone analysis on US financial listed companies

Purpose – The purpose of this paper is to investigate whether financial companies of the USA are inclined to
manipulate the management discussion and analysis (MD&A) tone and thus to follow impression
management behaviours. Also, the paper proposes a tone analysis of MD&As conducted by comparing the
tone of MD&As of one year with financial conditions of the same year and the next.
Design/methodology/approach – The tone analysis is conducted on two sub-samples of US-listed
financial companies, unhealthy firms and healthy firms, which experienced different financial conditions
between 2002 and 2011.
Findings – With regard to healthy firms, MD&A tone is useful to explain the current year’s performance and
helps to predict next year performance, whereas, with reference to unhealthy companies, managers use the
tone to pursue impression management strategies, by using more positive words and more future-oriented
words than healthy companies.
Research limitations/implications – This study analyses the correlation between MD&A tone at time
t and financial performance at time t and t+1, it does not investigate other time spans. The empirical results of
this study cannot be generalized to other countries.
Practical implications – Main implications are addressed to regulators and policy makers, which may
contrast impression management through a more effective regulation. Another implication regards investors,
who cannot fully rely on MD&As of unhealthy companies.
Originality/value – This study analyses financial companies, rather neglected by the literature on MD&A
tone. Results suggest that financial firms are also inclined to engage in impression management. This
research would be useful for investors who base their decisions on qualitative analysis, interested in
understanding to what extent the MD&A narratives are reliable.