Impact of MD&A sentiment on corporate investment in developing economies: Chinese evidence

Abstract

Purpose The goal of the study is to examine the effects of management discussion and analysis (MD&A) sentiment in public companies' annual reports on corporate investment incentives in developing economies. Design/methodology/approach The authors use sentiment analysis of MD&A texts based on Loughran and McDonald (2011) and combination of panel data regression, logit model and random forest. The text data consists of 3,511 annual reports of Chinese listed companies for the period from 2010 to 2019. Findings This paper provides empirical evidence of signaling theory that sentiment of annual reports and MD&A influences corporate decisions on both M&A and internal investments. The authors found that comparing to annual reports MD&A sentiment has more stable and significant explanatory and predictive power. Practical implications This paper confirms the importance of MD&A sentiment for corporate investment decision taking and provides practical techniques for analysts and researchers to study corporate investment incentives from the point of view of signaling theory. Originality/value The study aims to expand the domains of signaling theory and corporate investment valuation by including a broader range of data on companies' M&A and internal investments in developing economies. To explore the impact of MD&A sentiment on corporate investment, a state-of-the-art set of text mining and machine learning techniques is used. The authors' results confirm that MD&A has signaling effect and can get a positive market response. Furthermore, this study enhances the empirical evidence of overconfidence theory, i.e. optimistic management whose MD&A tend to positive overestimates the management's investments decision and also underestimate the potential risk to the firm.

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