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Does earnings management affect linguistic features of MD&A disclosures?

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  • Paul, Samit
  • Sharma, Prateek

Abstract

Earnings management literature considers high disclosure complexity as indicative of obfuscation. We argue that this singular focus on disclosure complexity can be misleading as managers adopt other obfuscation strategies too to conceal earnings management. We examine several alternative obfuscation strategies using a sample of 67,649 management discussion and analysis (MD&A) disclosures of US firms from 1994 to 2020. We find that managers obfuscate not only by increasing the disclosure complexity but also by omitting negative information, reducing information content, and projecting confidence about the state of the business. Robustness tests suggest that our findings are robust to potential endogeneity concerns.

Suggested Citation

  • Paul, Samit & Sharma, Prateek, 2023. "Does earnings management affect linguistic features of MD&A disclosures?," Finance Research Letters, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:finlet:v:51:y:2023:i:c:s154461232200530x
    DOI: 10.1016/j.frl.2022.103352
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    1. Li, Jing & Li, Nan & Xia, Tongshui & Guo, Jinjin, 2023. "Textual analysis and detection of financial fraud: Evidence from Chinese manufacturing firms," Economic Modelling, Elsevier, vol. 126(C).

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