Can the MD&A Tone of Listed Firms’ Annual Reports Predict Their Future Performance? Empirical Evidence Based on Machine Learning Text Analysis*

Abstract

Based on a sample of listed companies in China's A-share market between 2009 and 2019, we analyze the tone of the Management's Discussion and Analysis (MD&A) section of 15 743 annual reports through machine learning. The MD&A tone displays a significantly positive association with the firm's future financial performance, proving that the textual tone of MD&A includes forward-looking aspects regarding management's intentions for the company's prospects, and investors can use it to forecast the firm's future performance. Additionally, higher levels of internal control quality, stronger analyst following, and higher holdings by institutional investors can enhance the correlation between the MD&A tone and the company's future performance.