Repetitive disclosures in the MD&A

• Published date: 01 October 2019
• DOI: http://doi.org/10.1111/jbfa.12405
• Author: Heather Li
• Date: 01 October 2019

DOI: 10.1111/jbfa.12405

Repetitive disclosures in the MD&A

Heather Li

Bentley University,Waltham, MA, USA

Correspondence

HeatherLi, Bentley University, Waltham,MA,

USA.

Email:heather.li09@rotman.utoronto.ca

Abstract

This study is the first to empirically analyze repetitive disclosures

in the Management Discussion and Analysis (MD&A) section of the

10-K filing. Repetitive disclosures refer to the extent that content

in the MD&A is repeated from the audited financial statement

notes. I empirically analyze repetitive disclosures in the MD&A

section of the 10-K filing, and find that firms tend to use more

repetitive disclosures when firms have a new CEO, a high level of

new disclosures in the notes, issued equity, and have missed the

prior year’s earnings benchmark. These findings suggest that not all

managers use repetitive disclosures to simply obfuscate disclosures.

Rather, some managers use repetitive disclosures to emphasize

firm-specific events, consistent with the succession hypothesis.

The Securities and Exchange Commission (SEC) states that repet-

itive disclosures are uninformative and that such disclosures

decrease the informativeness of other disclosures in the MD&A.

Casting doubt on the SEC’s comments, in my primary analyses, I find

that repetitive disclosures are informative to investors; this result

is stronger for individual investors. Overall, my results suggest that

repetitive disclosures are informative, and such disclosures may be

effective tools for providing information to investors.

KEYWORDS

MD&A, repetitive disclosures, successive communication, textual

disclosures

1INTRODUCTION

Repetition is an essential part of life.1We repeat ourselves because it is quicker and uses fewer mental and phys-

ical resources. Repetition can also be an effective rhetorical tool to communicate messages to desired audiences

(Leonardi, Neeley, & Gerber, 2012). Repetition is catching regulators’ and standard setters’ attention, as managers

use it frequently in financial disclosures (Ernst & Young,2014; SEC, 2014b; SolomonEdwards, 2014). As the volume of

1Note, there is a subtle difference between repetition and redundancy.The English dictionary defines “redundancy” as something that is repeated unneces-

sarilyor something that is not useful because there is already another or more advanced version. However, repetition is simply the act of repeating something

thathas already been said or written. Without empirical analyses, this paper does not draw any conclusion on the usefulness of financial disclosure repetitions.

Therefore,the term “repetitive” is used.

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financial disclosures has grown, regulators and standard setters claim that financial disclosures are so repetitive that

it is difficult for investors to find the most important information (Ernst & Young,2014).

The International Accounting Standards Board (IASB) Discussion Forum has listed duplicative (i.e., repetitive)

disclosures as an urgent matter that needs to be addressed through the examination of the annual report (IASB, 2010,

2013). The Securities and Exchange Commission (SEC) documents many instances in which firms repeat disclosures

from the audited financial statement notes section (“notes”) in the Management Discussion and Analysis (MD&A),

inconsistent with the SEC’s call to eliminate repetition between the notes and MD&A (SEC, 2003, 2014a). Supporting

the views of the SEC and the IASB, in 2007, the Financial Accounting Standards Board’s (FASB) Investors Technical

Advisory Committee recommended to eliminate repetition between the MD&A and the notes (ITAC,2007). The FASB

emphasized the need to work with the SEC and minimize duplicative disclosures in annual reports because generally

accepted accounting principles (GAAP) and SEC rules often contain similar disclosure requirements (FASB, 2001,

2012).

I define repetitive disclosures as the percentage of content in the MD&A repeated from the notes. Examining such

repetitive disclosures is important for three main reasons: (1) the MD&A is one of the most widely read disclosures in

annual reports (e.g.,Li, 2010); (2) the SEC, the FASB, and the IASB have all shown an interest in understanding and elim-

inating repetitive disclosures between the MD&A and the notes;2and (3) the level of repetition between the MD&A

and the notes is significantly higher than it is between the MD&A and other 10-K sections. Based on my analysis,

repetitive disclosures have been steadily increasing since SEC EDGAR became available, particularly after major

disclosure policy changes (such as the Sarbanes–Oxley Act).3

Regulators and standard setters maintain that repetitive disclosures result from ambiguity in disclosure require-

ments and are uninformative (SEC, 2003; FASB,2001), leading to less transparent financial reporting and worse deci-

sion making (SEC, 2011). However,the succession hypothesis from the communication literature argues that the use of

repetitivedisclosures is an effective tool for disseminating information to recipients (Stephens, 2007). For instance, the

MD&A and the notes can be considered two separate information channels because a person can obtain information

separately from each of the two sections. This hypothesis posits that repetitive disclosures are informative because

users of financial statements may miss the information communicated in one channel but notice it through another

channel. The succession hypothesis further argues that repeating information through an alternative channel (e.g.,

repeating the note information in the MD&A) does not overburden a person’s processing capacity; rather,the infor-

mation is reinforced (Dahle, 1954). Using an experimental design, Stephens and Rains (2011) find that using repetitive

messaging to communicate in a situation of informational overload decreases perceptions of overload and increases

perceptions of information effectiveness.

Motivated by the discrepancy between regulators’ arguments and the succession hypothesis, I conduct the follow-

ing empirical analyses. I apply the Measure of Software Similarity (MOSS) plagiarism-detecting programto a large sam-

ple of MD&As spanning from 1995 to 2013 to examine two research questions.4First, I examine the determinants of

repetitive disclosures. I find that firms tend to use more repetitive disclosures when they havea new CEO, a high level

of new disclosures in the notes, issued equity,and have missed the prior year’s earnings benchmark, while controlling

for the competitiveand litigation environments. These findings suggest that not all managers use repetitive disclosures

to simply obfuscate disclosures. Rather, some managers use repetitive disclosuresto emphasize firm-specific events,

consistent with the succession hypothesis.

2Under the IFRS, the MD&A-equivalent financial disclosure is the Management Commentary. The IASB defines Management Commentary as a narrative

report that provides financial and non-financial information useful to users of financial reports, where “otherfinancial” is defined as information outside the

financial statements that assists in the interpretation of financial statements or improvesusers’ ability to make better economic decisions (IASB, 2018). Due

tothe fact that machine-readable Management Commentaries are not readily available, using the MD&A should also provide insight into the IASB’s concerns

regardingthe repetition between the Management Commentaries and the notes (IASB, 2010; Zhang, Aerts, & Pan, 2019).

3Forexample, in untabulated analysis, I find that the percentage of textual content in repetitive disclosures belonging to the significant accounting policy notes

increasedfrom 25% to 40% from 1995 to 2013.

4MOSS is a web-based plagiarism-detecting program hosted through the Stanford server by Professor Alex Aiken.For further details, see: http://theory.

stanford.edu/~aiken/moss/.

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Second, I investigate whether repetitivedisclosures are informative for investors. This question is the focal point of

my study because it addresses regulators’ and standard setters’ concerns. I find that repetitive disclosures are infor-

mative for investors. Specifically,the magnitude of absolute cumulative market-adjusted stock returns over the three

days beginning with the 10-K filing date is positively associated with the level of repetitive disclosures. However, this

relation is only significant in firms with low institutional ownership, suggesting that individual investorsmay find repet-

itive disclosures to be more informative. Additional analyses show that repetitive disclosures are not associated with

analyst earnings forecast revisions immediately following the 10-K release date, indicating that repetitive disclosures

maynot be informative to financial analysts. The findings are robust to controlling for a number of other 10-K filing and

firm characteristics and to alternative variable measurements.

In addition to my main contribution of providing insightful empirical evidence of regulators’ and standard set-

ters’ concerns over repetitive disclosures, I contribute to the literature in the following three ways. First, I provide

initial empirical evidence suggesting that repetitive disclosures are informative to users of financial statements,

particularly to individual investors. My results cast doubt on the SEC’s comments that firms should eliminate

repetitive disclosures. Understanding how individual investors use financial information is an important concern

for standard setters and regulators. My results can assist the SEC as it works closely with the FASB and the IASB

in deciding how best to address repetitive disclosures, while keeping in mind their mandate to protect individual

investors.

Second, with a growing interest in the textual analysis literature to use advances in computer science, my paper

introduces a new computer linguistic tool into accounting disclosure research (El-Haj, Rayson,Walker, Young,& Simaki,

2019). Using the advantages of MOSS, I provide the first large-sample study to further our understanding of repetitive

disclosures, focusing specifically on the repetition between the MD&A and the notes. Finally, I contribute to both

communication and advertising literature fields with a longstanding interest in the topic of repetitive communication

(Johnson & Watkins, 1971; Pechmann & Stewart, 1988; Shannon & Weaver, 1949), which has become increasingly

common (Law, 2002; Leonardi et al., 2012). My use of a financial reporting setting to test the succession hypothesis,

developedin the communication literature, helps broaden our understanding of financial reporting as well as repetitive

communication.

2BACKGROUND AND HYPOTHESES DEVELOPMENT

Courtis (1996) manually examines the repetition level within the voluntary disclosures of 145 Hong Kong annual

reports. Cazier and Pfeiffer (2017) use a sample of 63,695 firm-years, spanning from 1994 to 2013, to examine dis-

closures repeated between sections of 10-K excludingthe notes versus the notes. Merkley (2014) uses disclosure rep-

etition as a measure of quality to improve our understanding of R&D disclosures in the 10-K. It is important to keepin

mind that the sample sizes of the aforementioned studies are relatively small in comparison to this study.The evidence

found is also mixed and inconclusive. For instance, Courtis (1996) finds that repetition within annual reports’ volun-

tary disclosures does not overload users with too much information, but Cazier and Pfeiffer (2017) find repetition to

be negative and used to hamper the interpretation of 10-Ks. What is more important is that none of the aforemen-

tioned studies speak directly to the understanding of the determinants and consequences of the repetition between

the MD&A and the notes, which remains a keyconcern for the SEC and the FASB.

Item 303 of Regulation S-K mandates that companies should disclose the MD&A as Item 7 in the 10-K filing. Accord-

ing to the SEC, the MD&A should: (1) provide an insider’s view of a company’s financial performance with a forward-

looking orientation; and (2) complement as well as supplement audited financial statements in providinga discussion of

capital resources, results of operations, off-balance sheet arrangements,critical accounting estimates, significant con-

tractual obligations, and other material and relevant information (SEC, 1987, 2003).The SEC emphasizes the need for