Asymmetric Tone in Management Discussion and Analysis and Its Impact: Evidence from the Chinese Stock Market

This paper investigates the relationship between managerial tone in management discussion and analysis (MD&A) disclosures and stock price crash risk. We make a distinction between two types of tone—concave and convex—based on how managers’ tone changes according to whether performance is good or bad. Tone is classified as ‘concave’ (‘convex’) when managers overstate (understate) bad news and understate (overstate) good news. Using data on Chinese listed firms from 2013 to 2018, we find that convex tone is positively associated with stock price crash risk, and negatively associated with future performance. The positive relationship between convex tone and stock price crash risk is more pronounced for firms with high free cash flow, opaque financial reporting, and non‐stated‐owned enterprises. These results suggest that the use of a convex tone in MD&A may have a negative impact on the capital market.