Incremental information content of prospective disclosures in management discussion and analysis

Prospective information and disclosures have been considered to have the potential to provide information to financial statement users for decision making. One purpose of this study was to determine if prospective disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) were useful to financial statement users. If the prospective information in MD&A is useful, it should be reflected in security returns. A mean-adjusted model was used to calculate the abnormal security returns. Another purpose was to determine whether the SEC could gain greater compliance in reporting prospective information by issuing an interpretive release (Financial Reporting Release, FRR-36).; Ordinary least squares regression was used to regress the cumulative abnormal returns on selected independent variables. An independent variable (disclosure index) that represented the prospective disclosures in MD&A was developed from a survey sent to Chartered Financial Analysts (CFAs). Other independent variables (cash flow, size and exchange) that had been associated with information content in previous studies were included to control for the possible compounding effect of information, other than the prospective disclosures, released with the annual report. Earnings were controlled by the use of an eight day time period between the release of earnings and the release of the annual report (10-K).; The results indicated that the prospective disclosures in MD&A are useful as indicated by an association between the abnormal security returns and the disclosure index. The number of disclosures increased in the time period after FRR-36 relative to before FRR-36. The model that used a three day event period suggested that FRR-36 had its intended effect of improving the quality of prospective disclosures in MD&A.