Experimental Examination of Nonprofessional Investors’ Use of MD&A Disclosures

• In Event: Information Technology / Behavioral

Abstract

This study proposes and tests a two-part model of how nonprofessional investors use information contained in the MD&A. The results from an experiment provide support for the model. In particular, the findings suggest that nonprofessional investors use the MD&A in two related ways. First, they consider the degree to which MD&A disclosures deviate from their expectations to infer management’s reporting credibility. Specifically, unclear MD&A disclosures are more likely to deviate from investors’ expectations and thus lead to lower perceptions of management’s reporting credibility than clear MD&A. Second, investors’ perceptions of management’s reporting credibility and the valence of the information in the MD&A jointly influence investors’ decisions in the way that the favorable effect of a positive management forecast in the MD&A is observed only when management’s reporting credibility is perceived to be high, but not when it is perceived to be low. This study also provides evidence that MD&A clarity influences investors’ decisions through the mediating effect of management’s reporting credibility. Implications for research and practice are discussed.

Authors

• Wei Li, Kent State University - Kent

• Bernard Wong-On-Wing, Washington State University

• Tai Fan, Southwest University For Nationalities