Annual reports were found to be much better at predicting good news than bad news.
The Securities and Exchange Commission mandated in 1980 that public companies' annual reports include a management's discussion and analysis (MD&A)
section that assesses the enterprises' liquidity, capital resources and operations in a way many investors can understand. One of the goals was to make public information about predictable future events and trends that may affect future operations of the businesses.
Has the SEC goal been fulfilled? This article examines that question and comes up with some disturbing answers.
Eight years after the MD&A ruling, the SEC concluded that the reports were not meeting this goal. As a result, the agency issued guidelines on exactly what data it expected companies to incorporate in MD&A statements. It said it wanted each business to provide information about company-specific and industry-specific trends affecting its bottom line. Currently, many in the SEC staff still are not satisfied the agency's original goals are being met.
CREATING A SAMPLE
To test that contention - and to determine whether the data in MD&As provide useful clues to a company's future performance - we randomly selected 25 companies from Moody's Handbook of Common Stocks. The publication evaluates public companies' performances on a quarterly basis, reviews their financial performances and stock prices and, most important for our purpose, lists events (labor conflicts, new competition, etc.) that appeared to influence a company's …