Is the Rhetorical Tone in a MD&A Consistent with Financial Performance?

This paper investigates whether management writers communicate truthful information to investors by offering relevant data about financial performance. This work expands on the understanding of the potential congruence of rhetorical tone in Management's Discussion and Analysis of Financial Condition and Results of Operations (hereafter MD&A) text with financial performance. The 475 MD&A sections are analyzed using rhetorical tone derived from Diction 7. This verbal tone is measured by five thematic indicators, namely, activity; optimism; certainty; realism, and commonality; while the performance is measured by past and future growth of revenue. Management tone in communication is found to be affected by industry type. However, the association between the rhetorical tone of narrative disclosures and financial performance is not observed. Firms with different financial circumstances use the same rhetorical tone to deliver the different purpose of describing the corporate historical performance and talking about their expected future performance. This suggests that the management writers do create a MD&A as part of an annual routine just to satisfy the shareholders. This paper concludes that public firms most likely do not use their financial performance as a guide for writing MD&As. The study recommends conducting a more efficient analysis of the narrative disclosures