Management Tone On Analysts’ Forecast Revision

In order to improve the quality of information disclosure of listed companies,protect legitimate rights and interests of public investors and enhance the effectiveness of capital markets,the China Securities Regulatory Commission(CSRC)has attached greater importance and higher requirements on the quality of management’s discussion and analysis disclosure(MD&A)in annual and interim reports.As a result,the tone of MD&A conveys richer information and is more feasible to the public.Since the issuance of the "Guidelines on the Contents and Formats of Corporate Information Disclosures in Public Offering Securities No.3–Semi-annual Report" in 2002,CSRC have stipulated and explained the contents and forms of the disclosure to the MD&A on many occasions.At present,by analyzing the information conveyed in MD&A,a company’s past performance and future development can be understood.MD&A serves as a window for enterprises to make public information disclosure,thus providing incremental information for analysts.In order to provide the most reliable and professional report to the capital market,analysts will track the latest information of the company.After the MD&A is released,analysts will pay close attention on relevant information in time to guide them through making earnings forecasts.When analysts find that the company’s earnings are inconsistent with previous forecasts,they tend to update their past earnings forecasts,that is,make forecast revision.Whether the tone of MD&A will affect analysts’ forecast revision,to what extent do the tone of MD&A affect analysts’ forecast revision and in addition,how the tone of MD&A affect analysts’ forecasts revision are the questions to be discussed in this paper.The data of companies used in this paper are listed companies in China from2013 to 2021.This paper defines and constructs the tone of MD&A by means of text analysis,and studies the relationship between tone of MD&A and analysts’ forecast revision by means of regression analysis.A series of heterogeneity analysis,mechanism analysis and robustness analysis are also carried out to ensure the research results are robust and reliable.First of all,the empirical regression shows that within 90 days of the release of the MD&A,the tone of MD&A has a positive correlation with analysts’ forecast revisions,that is,the tone of MD&A significantly improves the percentage of analysts making forecast revisions,that is,the likelihood of analysts making forecast revisions.Besides,the tone of MD&A also leads to more positive forecast revisions.Such conclusions remain after a shorter-period(60 days)and longer-period(120days)robustness test.Considering the possible reverse causality problem,this paper uses the average value of each province’s MD&A tone every year as an instrument variable to conduct endogeneity test and the results remains robust.Secondly,considering that different corporate characteristics,analysts’ characteristics and social environment may have different degrees of impact on analysts’ forecast revision,this paper conducts a heterogeneity analysis based on company market value and analysts’ optimism in order to explore how the tone conveyed by MD&A has different impact on analysts’ forecast correction under different corporate and analysts’ characteristics.The results show that companies with larger market value,analysts with higher optimism are more likely to be influenced by the tone of MD&A.In addition,this paper also considers the impact of COVID-19 on social and economic development.Under such circumstances,analysts are more pessimistic about economic development,and their response to the tone of the MD&A is much less than before.Finally,this paper discusses how the tone of MD&A will affect analysts’ forecast revision behavior from four aspects: information quality,information transparency,company’s performance afterwards and analysts’ research.It is found that the net positive tone of MD&A often indicates that the company’s information delivered to the market is of higher quality,the company’s information disclosure level is higher,the company’s performance in the next reporting period is better,and analysts will conduct more research activities,so more analysts tend to make forecast revisions.Based on the textual information in MD&A,this paper studies the tone of MD&A and analysts’ forecast correction behavior.To a certain extent,it enriches the research related to analysts’ forecast revision,which has certain theoretical and practical significance for better understanding the information asymmetry between enterprises and investors in the capital market and improving the efficiency of the capital market.