(The) effect of managerial ability on the forward-looking information in annual reports

Abstract

I examine the relation between managerial ability and the forward-looking information in annual reports. I conjecture and find that higher-ability managers provide annual reports (form 10-Ks) with Management Discussion and Analysis (MD&A) sections whose forward-looking textual tone is more consistent with future earnings performance. In addition, it is found that higher-ability managers provide less forward-looking sentences and more negative forward-looking sentences in their MD&A sections when the ex-ante litigation risk is high.