A Study On Capital Market Reaction Of The GEM Listed Corporations Text Inertia Disclosure

As an important part of financial report,"Management’s Discussion andAnalysis"(MD&A) provides investors historical information to look at businessconditions and forward-looking information on future events, and plays a crucial rolein investors’ decision-making. But MD&A disclosed by management is notdynamically adjusted in the time sequence, what the economic consequences it willbring to the capital markets, which is the issue investors and regulators are generallyconcerned about.On the background of China’s Growth Enterprise Market (GEM), the paperstudies on capital market reaction of the GEM listed corporations text inertiadisclosure behavior. First, relevant literature is reviewed and evaluated, then relevanttheories are expounded and a theoretical analysis is made from three aspects: MD&Atext inertia disclosure behavior, capital market reaction on MD&A text inertiadisclosure behavior and information extraction technology. Afterward taken as theobject of our analysis the text information disclosure (MD&A) of the GEM listedcompanies in the past two years (2010-2012), this paper quantitatively measures thelevel of MD&A inertia disclosure behavior by the indicator "information similarity",and improves the Fama-French asset pricing model to explore the correlationsbetween the information similarity and the cost of equity capital. The result of ourstudy indicates that, a positive relationship between information similarities of thewhole MD&A with the cost of equity capital exists; ceteris paribus, a positiverelationship between the information similarities in the historical part of MD&A withthe cost of equity capital exists while a negative relationship between the informationsimilarities in the forward-looking part of MD&A with the cost of equity capitalexists.What’s more, the forward-looking information always maintains a high degreeof similarity, and almost copies the disclosure contents of the previous period.According to the results of empirical research, and combined with China’s actualcontext, three policy suggestions are put forward: improving the managementmechanism for information disclosure, improving the level of management’sinformation disclosure work and cultivating effective investors.This paper uses textinertia disclose data and empirically tests the relation between GEM listed companiesMD&A inertia disclosure behavior and the cost of equity capital, which not only enriches the literature of information disclosure, but also enhances understanding oftext information disclosure behavior.