The Impact of Geographic Industry Clusters on MD&A Disclosure: MD&A Similarity with Local Industry Peers

• In Event: Financial Accounting and Reporting: Corporate Social Responsiblity & Disclosures

Abstract

This study investigates whether managers refer to local industry peer disclosures when they prepare their own MD&As. Both boilerplate theory and institutional theory suggest managers have incentives to prepare disclosures by gathering peer firms’ information and learning from them. Given that geographic industry clusters play an essential role in facilitating inter-organization information exchange and connections among its participants, I predict and find that firms adopt similar MD&A disclosures with industry peer firms from the same geographic industry clusters, and additionally, these co-located peer firms contain similar forward-looking disclosures in their MD&As. The analyses further show strong social networks among these inter-connected industry peers function as a channel that facilitates the effect of geographic industry clusters on MD&A similarity; in particular, results are stronger when firms are located in clusters with strong social capital, hire the same directors, and are served by the same auditor. In addition, as expected, the results show younger firms are more likely to issue MD&As similar to local industry peers. In contrast, leading firms are less likely to be affected by local industry clusters, and firms who face competitive pressure issue less similar MD&A disclosure with local peers. I also find that after firms relocate, their MD&As become more similar to those issued by local industry peers located in the new clusters, which is consistent with managers referring to local industry peers to prepare MD&A disclosures. Finally, I provide initial evidence that MD&A similarity improves the information environment. Overall, this study advances our understanding of how managers prepare MD&A disclosure by exploring the convergence of MD&As among industry peers, and it extends the literature on geographic locations providing new insights on the impact of geographic
industry clusters.

Author

• Yiding Wang, University of Oklahoma