Effect of positive tone in MD&A disclosure on capital structure adjustment speed: evidence from China

Qian Wang · Duowen Wu · Lina Yan

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Auditing, Earnings Management, Governance Corporate Finance and Governance Financial Analysis and Corporate Governance

Abstract

Abstract We explore the influence of text tone on capital structure, especially the impact of positive tone in management discussion and analysis (MD&A) disclosures on the capital structure adjustment speed of Chinese listed firms in Shanghai and Shenzhen Stock Exchange. We find that positive tone in MD&A disclosures significantly promotes the dynamic adjustment of capital structure. Specifically, we identify two types of positive tone: exaggerated and true. We find that only true positive tone significantly promotes the adjustment speed of capital structure. This paper supplements the relevant literature on the dynamic adjustment of capital structure from the perspective of non‐financial narrative information, and provides evidence for the effect of strategic tone management in textual analysis.

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References

2002Illiquidity and stock returns: cross-section and time-series effects 1984The Capital Structure Puzzle 1995What Do We Know about Capital Structure? Some Evidence from International Data 2011When Is a Liability Not a Liability? Textual Analysis, Dictionaries, and 10‐Ks 2001The theory and practice of corporate finance: evidence from the field 2004The Cash Flow Sensitivity of Cash 2002Testing Trade-Off and Pecking Order Predictions About Dividends and Debt 2009How does financial reporting quality relate to investment efficiency?

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