Corporate Governance and MD&A Readability

• In Event: Accounting Behavior and Organizations / Information Systems / Management Accounting
  In Paper Session: Accounting, Behavior and Organizations / Information Systems / Management Accounting

Abstract

In this study, we examine the role of corporate governance in influencing the quality of the Management Discussion and Analysis (MD&A) section, measured by MD&A readability. We focus on Fortune 500 firms because the SEC reviewed the MD&A section of these firms in early 2002 and expressed concerns about the quality of their MD&A. We examine four dimensions of corporate governance in these firms, namely, their managerial ownership, composition of board of directors, audit committee independence and shareholder rights. Using Fog index and Flesh score to measure MD&A readability, our study provides the following findings. First, the readability of Fortune 500 firms’ MD&A is generally low, but it has improved for the period of 2002 to 2006. Second, MD&A issued by firms with more management ownership, fewer independent directors on the board of directors, less independent audit committee and stronger shareholder rights have higher readability.

Authors

• Wei Li, Kent State University

• Pervaiz Alam, Kent State University

• Li Wang, University of Akron