Stock exchange comment letters and MD&A tone management

Abstract

This paper investigates the impact of stock exchange comment letters on MD&A tone management by Chinese listed firms. Our findings are twofold. First, abnormal positive MD&A tone is significantly reduced for firms receiving comment letters from stock exchanges. Second, comment letters have made abnormal positive MD&A tone more informative about future accounting earnings. Further analysis suggests that the treatment effect of stock exchange comment letters on MD&A tone management is more pronounced when the comment letters make stronger demands, or firms face greater concerns over proprietary information or attract more media attention. These findings are consistent with the view that stock exchange comment letters can restrain uninformative tone management leading to enhanced financial reporting quality.