MD&A tone and stock returns

This paper examines the impact of the MD&A (Management’s Discussion and Analysis) tone on cross-sectional stock returns in the unique context of Chinese A-share companies. We find a significant and positive relationship between the MD&A tone and Chinese stock returns after controlling for quantitative financial metrics. Our results suggest that the MD&A tone provides additional value that further enhances the information quality in MD&A disclosures and market responses. Furthermore, we observe that the textual tone effect is more pronounced for firms with lower institutional ownership, lower financial transparency, in less competitive market environments, and both the information factor and the sentiment factor of MD&A tone positively affect stock returns. Thus, we provide convincing evidence that MD&A narratives can serve as an effective communication tool to facilitate disclosure and mitigate information asymmetry between corporations and investors.