This research aims at assessing the usefulness (or reliability) of the forward-looking information disclosed by managers in MD&As in predicting future financial condition of a firm, through a tone analysis. Furthermore, our study is aimed at evaluating whether the reliability of MD&A decreases if the firm is experiencing financial difficulty, since managers use more discretion in disclosing information compared than in healthy firms. Finally our study is aimed at analysing the association between the extent of MD&A at time t and the financial performance at time t+1. The study is conducted on two sub-samples of US listed financial companies which experienced different financial conditions, namely Unhealthy Firms and Healthy Firms, between 1995 and 2011. Empirical results demonstrated that managers of financial companies provide reliable qualitative information in MD&As useful to forecast performance of the next year, in terms of positive versus negative words. Further, the comparison of empirical results obtained by the analysis of the two sub-samples, showed that the reliability of the tone of MD&As decreases with the worsening of firms’ financial conditions. Finally, this research provides useful statistical tools to support investors to investigate the reliability of the overall financial disclosure.
Key-Words: Integrated Reporting, Management Discussion & Analysis; Disclosure; Financial Companies; Tone Analysis; Text Mining
