New European Union’s Requirements and IFRS Practice Statement “Management Commentary”: Does MD&A Disclosure Quality Affect Analysts’ Forecasts?

The Management Discussion and Analysis (MD&A) is a mandatory document under the European Union’s (EU) law. In 2003, the EU issued Directive 2003/51/EC, which broadened the information that firms have to provide in their MD&A, and in 2010, the International Accounting Standards Board (IASB) issued the International Financial Reporting Standards (IFRS) Practice Statement “Management Commentary”, a non-binding guidance for the presentation of this document. The aim of this paper is to examine the relationship between MD&A disclosure quality and properties of analysts’ forecasts. In fact, although most studies found that financial analysts mainly refer to financial statement data in forecasting earnings, there are few researches highlighting the importance of MD&A disclosures for financial analysts. On this basis, Ramnath, Rock, and Shane (2008) called for researches in order to better understand the relationship between the information really used by analysts and their forecasts. To assess the quality of MD&A disclosures, we developed a multidimensional measure on the basis of the EU requirements and the IFRS Practice Statement, and then, we regressed this variable on both forecast accuracy and dispersion. The findings show that our measure of MD&A disclosure quality is significantly and positively related to forecast accuracy. We conducted other analyses in order to better understand the previous relationship and we found that, if we analyze the different information contained in the MD&A statement, financial analysts consider useful accounting and financial data in forecasting earnings. These results enhance our understanding of the role of MD&A disclosures in the wide set of information that firms provide to financial statement users.