Research On The Usefulness Of Management's Discussion And Analysis Of Chinese Public Companies

Management's Discussion and Analysis, or MD&A, is the most valuable part of the information package disclosed by public corporations. Containing information that can't be reported in the GAAP-based financial statements and footnotes, MD&A meets investors' demand for more informative and forward-looking information. By means of MD&A, investors can get a better understanding of managements' attitude towards the important historical events of the companies, their evaluation of major risks and their projections for significant future events and the basis on which those projections were made.It has been five years since China Securities Regulatory Commission set up the MD&A disclosure system in 2002. Do the current MD&As disclosed by Chinese listed companies have the expected function of improving the quality of information disclosure? Research on the usefulness of MD&A is of great importance because MD&A's usefulness is directly related to the necessity and reasonability of its very existence, and research on it paves the way for other related studies. On the other hand, there hasn't been any in-depth study on the usefulness of MD&A in China up till now, so it is worth researching and discussing. This paper chooses as research subjects the MD&As in the 2004 semi-year financial statements of 400 companies randomly chosen from all A-stock companies in the Shanghai Stock Market. It studies the usefulness of managements' discussion and analysis of the price, sale volume and manufacturing cost of major products, investment projects and future forecasts in predicting the companies' future sale volume, net earning per share and cash flow from operating activities and the stock market's reaction towards the MD&A disclosure. The results of this empirical research show that Chinese MD&As are effective predicting indictors of the companies' future operating results and the stock market does make reactions quickly and accordingly. But this paper also shows that Chinese investors might have placed too much confidence in the forward-looking information in the MD&A and the managements of Chinese public companies have a tendency to disclose more good news and less bad news in the MD&A. In the concluding part of this paper, some suggestions are put forward as to further develop the MD&A system in China.