New required disclosures in Italian companies’ MD&A and analysts’ earnings forecasts

Management Discussion and Analysis is a mandatory document under Italian law. In 2007, the Italian legislator issued D.Lgs. 32/2007, which broadened the information that firms have to provide in their MD&A. Italian companies have been required to prepare their MD&A according to these new requirements since the fiscal year 2008. This paper develops a framework for analyzing MD&A disclosures on the basis of the new legal requirements, and investigates the content of the Italian companies’ MD&A disclosures provided for 2008, in order to verify the impact of new MD&A requirements on their disclosure behavior. Moreover, the paper examines the relationship between the MD&A disclosures and properties of the analysts’ earnings forecasts, i.e. forecast accuracy and dispersion. The findings show that Italian companies responded in a positive way to the new legal requirements, but mainly with regard to the information concerning the review of the data contained in the financial statement. Moreover, we provide evidence that the level of MD&A disclosures is significantly and positively related to forecast accuracy. In particular, this result confirms that MD&A is an important determinant of the accuracy of analysts’ forecasts. The results enhance our understanding of the role of MD&A disclosures in the wide set of information that firms provide to financial statement users.