The Quality of Management Discussion and Analysis (MD&A): A Voluntary Disclosure Perspective

Abstract

In this study, we appeal to existing corporate disclosure literature to enhance our understanding of the observed variation in MD&A disclosure quality. To address these issues, we first attempt to model both internal and external factors that influence the choice of MD&A disclosure quality. Recognizing that there are a number of media in addition to MD&A (or the annual report more generally) through which a firm may disclose information, one variable we include is a measure of the extent of a firm's activity in the press. We also consider whether each of the five MD&A subcomponents (Operations, Financial Condition, Liquidity, Forward-Looking Information, and Risk and Uncertainty) is subject to the influence of the same set of factors as the overall MD&A disclosure. Our sample consists of 91 of the largest Toronto Stock Exchange (TSE) 300 group of companies in 1992. The quality of their MD&A disclosures has been scored by members of the Toronto Society of Financial Analysis (TSFA). The results suggest that overall MD&A disclosure quality is related to firm performance, the level of its financing activity, firm size, the firm's past disclosure predisposition, the extent of its disclosure through the press, and the occurrence of major events. However, the various subcomponents of MD&A are influenced by different factors, reflecting the differences in the compositions of time varying versus time invarying considerations in each subcomponent. The results also suggest that the extent of a firm's activity in the press is related to a similar set of factors as MD&A disclosure quality. Thus, it would appear that a firm's choice of MD&A disclosure quality is the result of a conscious, deliberate overall disclosure strategy on the part of the firm with disclosure in MD&A and through the press viewed as complementary.