Original Article
Algorithmic Trading and Forward-Looking MD&A Disclosures
WAYNE B. THOMAS,
YIDING WANG,
LING ZHANG,
WAYNE B. THOMAS
Michael F. Price College of Business, University of Oklahoma
Search for more papers by this authorYIDING WANG
Marilyn Davies College of Business, University of Houston–Downtown
Search for more papers by this authorLING ZHANG
Michael F. Price College of Business, University of Oklahoma
Search for more papers by this authorWAYNE B. THOMAS,
YIDING WANG,
LING ZHANG,
WAYNE B. THOMAS
Michael F. Price College of Business, University of Oklahoma
Search for more papers by this authorYIDING WANG
Marilyn Davies College of Business, University of Houston–Downtown
Search for more papers by this authorLING ZHANG
Michael F. Price College of Business, University of Oklahoma
Search for more papers by this authorAccepted by Philip Berger. We appreciate very helpful comments from an anonymous reviewer, Yun Fan, and workshop participants at the University of Calgary. An online appendix to this paper can be downloaded at https://www.chicagobooth.edu/jar-online-supplements.
ABSTRACT
This study examines how algorithmic trading (AT) affects forward-looking disclosures in Management Discussion and Analysis (MD&A) of annual reports. We predict and find evidence that AT relates negatively to modifications in year-over-year forward-looking MD&A disclosures. This evidence is consistent with AT reducing investors’ demand for fundamental information, which reduces managers’ incentives to supply costly forward-looking disclosures. Cross-sectional tests provide additional evidence that this negative relation is more pronounced for firms with larger earnings surprises and those with losses. We further validate our conclusion by demonstrating that investors’ fundamental information searches are a channel through which AT affects forward-looking disclosures. The conclusion is robust to using the SEC's Tick Size Pilot Program as an exogenous shock to AT and to using alternative disclosure measures (e.g., tone revisions and number of sentences in forward-looking MD&A disclosures). Overall, our study demonstrates that AT is a contributing factor to regulators’ concerns over the diminishing usefulness of forward-looking information in MD&A disclosures.
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