MD&A Disclosure and the Firm’s Ability to Continue as a Going Concern

June 14, 2013 Leave a comment

MD&A Disclosure and the Firm’s Ability to Continue as a Going Concern

William J. Mayew Duke University – Fuqua School of Business

Mani Sethuraman Duke University – Fuqua School of Business

Mohan Venkatachalam Duke University – Fuqua School of Business

March 22, 2013

Abstract: 
This paper explores the role of textual disclosures in the MD&A section of a firm’s SEC 10K filing to predict a firm’s ability to continue as a going concern. Using a sample of firms that filed for bankruptcy over the period 1995-2011 and a matched set of control firms we find that both management’s opinion about going concern stated in the MD&A and the linguistic tone of the MD&A together provide significant explanatory power in predicting whether a firm will cease as a going concern. Moreover, the predictive ability of MD&A disclosure is incremental to financial ratios, auditor going concern opinion, and market based variables. The striking feature of our findings is that the information in MD&A disclosures is more useful in predicting bankruptcy relative to financial ratios three years prior to bankruptcy. This suggests that MD&A disclosures are more timely than financial ratios and hence, a leading indicator of going concern problems. Our findings have important implications for current standard setter deliberations on whether to mandate qualitative disclosures about management’s assessment of the firm’s ability to continue as a going concern.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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