Shareholders' Perceptions on The Usefulness Of MD&AS

Abstract

This paper reports the results of an extensive study of the effectiveness of MD&As. Our primary research question can be stated as follows: To what extent do MD&As, as currently issued, meet the self‐perceived needs of individual investors? To answer this question, we examine the responses to a survey questionnaire. The content of the questionnaire was based on an earlier survey conducted in 1973 by Epstein (1975). Our results are based on a random sample of shareholders owning at least 100 shares of one stock on either the New York Stock Exchange or the American Stock Exchange. We conclude that the MD&A section of annual reports is a potentially useful investment tool. In its current state, however, investors read it less, and rank it as less useful than the financial statements. Our survey indicates that it is not difficult to understand. We attribute its poor performance, in part, to a lack of credibility, and, to a larger extent, to a lack of prospective information. Evidence on the relationship between demographic characteristics and usefulness shows that wealthy, inexperienced investors are the only group of investors who are currently using the MD&A in any substantial way.