How Do Firms Change Investments Based on MD&A Disclosures of Peer Firms?

I study whether and how firms change their investments based on information in their peers’ management discussion and analysis disclosures (PMD&As). PMD&As may change firms’ investments by providing information about the industry’s growth prospects (industry effects hypothesis) or competitive pressures (competition effects hypothesis). I find a positive association between changes in firms’ future investments and the change in the tone of PMD&As, consistent with the industry effects hypothesis. This association is stronger in settings of homogenous environments, smaller firm size, and poor firm performance, while it is weaker in settings of low-quality PMD&As. Moreover, firms alter their short-run investments based on PMD&As, and investments that deviate from the peers’ tone damage firm values. Additional analyses show that competition-related topics in PMD&As adversely affects firms’ investment decisions. Overall, my findings show that firms actively change their investments based on information provided by PMD&As.