THE INDONESIAN JOURNAL OF ACCOUNTING RESEARCH
Vol.26, No. 2, May – August 2023 | https://ijar-iaikapd.or.id/ | DOI: 10.33312/ijar.667 Page 183 - 208
*Corresponding Author: [email protected]
Disclosure Practices of Management Discussion and Analysis:
A Study on the Indian Corporate Sector
VIJAY SINGHHIMANI SINGLA*
Department of Commerce, Indira Gandhi University, Meerpur –Rewari, India
Abstract: As an emerging economy, India’s post-pandemic resilience supports this study. We scrutinize current MD&A (Management Discussion and Analysis) reporting practices by Indian firms, aligning with the 'Industry, Innovation, and Infrastructure Development' goal of Sustainability. Data was extracted from annual reports of selected listed Indian companies for the years 2016-2021. The data was analyzed using content analysis and t-tests. We found an encouraging increase in the quantity and quality of disclosures over time, even during the pandemic. However, there is a significant discrepancy with quality lagging behind quantity. These findings highlight an urgent need for improved MD&A disclosures. Managers, regulators, and organizations could use this study to identify issues and strategically direct their efforts for maximum benefits in this domain. This pioneering study assesses adherence to MD&A practices within the Indian context, extending its contribution to the accounting literature of other developing Asian economies, such as Indonesia, Malaysia, and China, where MD&A practices are still evolving.
Keywords: MD&A Reporting, MD&A Disclosures, Disclosure Quantity, Disclosure Quality, Current Practices, Content Analysis
Abstrak: Sebagai ekonomi yang sedang berkembang, ketahanan India pasca-pandemi menjadi latar belakang untuk penelitian ini. Kami memeriksa praktik laporan MD&A (Management Discussion and Analysis) saat ini oleh perusahaan-perusahaan India, yang sejalan dengan tujuan 'Pengembangan Industri, Inovasi, dan Infrastruktur' dari Keberlanjutan. Data diperoleh dari laporan tahunan perusahaan-perusahaan yang terdaftar di India untuk tahun 2016-2021. Data dianalisis menggunakan analisis konten dan uji t. Kami menemukan peningkatan yang menggembirakan dalam kuantitas dan kualitas pengungkapan sepanjang waktu, bahkan selama pandemi.
Namun, ada perbedaan signifikan dimana kualitas lebih rendah dibandingkan kuantitas. Temuan ini menyoroti kebutuhan mendesak untuk peningkatan pengungkapan MD&A. Manajer, regulator, dan organisasi dapat menggunakan penelitian ini untuk mengidentifikasi masalah dan mengarahkan upaya mereka secara strategis untuk manfaat maksimal dalam domain ini. Studi ini menilai kepatuhan terhadap praktik MD&A dalam konteks India, memperluas kontribusinya pada literatur akuntansi dari ekonomi Asia lainnya yang sedang berkembang, seperti Indonesia, Malaysia, dan China, di mana praktik MD&A masih berkembang.
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Kata Kunci: Pelaporan MD&A, Pengungkapan MD&A, Kuantitas Pengungkapan, Kualitas Pengungkapan, Praktik Saat Ini, Analisis Konten
1. Introduction
Globalization has brought the business world together and increased the accessibility of capital and other resources worldwide without much effort and time.
This mandates the need for effective financial reporting in developing nations as new capital markets are continuously emerging and growing there. Therefore, good corporate governance must be followed up while preparing financial reports to enhance transparency and substantially adequate disclosures.
Every financial report reader requires authentic and relevant information provided in the corporate annual reports. And the modern corporate culture is based on trust and confidence to achieve long-term shareholders' value and Sustainability (Dharma et al., 2023; Meenakshi & Manoj, 2010). Nowadays, corporates are not only accountable for true financial results but have more responsibilities towards society, the economy, and the environment. The annual report contains information related to stakeholders in comprehending the company's financial performance and determining plans while considering potential hazards (Bostan et al., 2022; Pava &
Epstein, 1993). Shareholders and stakeholders want financial information and other relevant non-financial information for better decision-making. Thus, the annual report's Management Discussion and Analysis (MD&A) section fulfills this main objective of corporate reporting (Singh and Singla, 2021). This section not only provides financial information but the non-financial relevant information related to the organization that helps investors and other stakeholders to make up their minds about the enterprise (Barron & Kile, 1999; Cole, 2012). Increasing visibility for better performance evaluation is the main objective of the MD&A report, and this goal can be achieved by providing information in a very objective and accurate manner.
India is one of the fastest-growing economies in the world and attracts much investment from local and foreign investors. Therefore, it becomes important to
185 study the financial reporting practices followed by Indian companies in their annual reports and communicate with the stakeholders. MD&A reports in India are guided and regulated by the Securities and Exchange Board of India (SEBI). Although, In India, this concept was adopted in early 2000, in clause 49 of the listing agreement, not much emphasis was laid on the MD&A reports and was just needed to provide in addition to the directors’ report. After a decade, Company Act 2013 again highlighted the MD&A to be disclosed in the annual reports of Indian companies as part of the Director's report and forming part of the annual report. Company Act 2013 has specified the MDAR (MD&A report) in clause 49 VII (D) in the Board of required the MDA as a part of mandatory disclosure for all the listed companies to be disclosed. Then, almost after two years, SEBI (Securities and Exchange Board of India) revised the MD&A disclosures in Listing and Obligation Requirements (LODR, 2015) section 34(2)(e) as to disclosed every listed company on the Indian Stock Exchange requires to disclose MD&A section in their annual reports which provide information from the eyes of the management (Companies Act, 2013; SEBI, 2015). It means all the information disclosed in the MD&A reports should reflect the views and opinions of the management of the companies since managers are the only person who is closely associated with the operations, strategies, vision, and mission of the organization. Therefore, their views about the company's performance and plans are important.
Hence, MD&A is a crucial document to study in the corporate annual report for better decision-making. SEBI has also mandated nine points where the information should be provided in the MD&A report. Those nine points are as follows: 1). A SWOT analysis of the business; 2). Outlook for the business; 3). Performance breakdown, either segment-wise or product-wise; 4). Key ratios showing the financial position and performance; 5). Key risks and steps to mitigate those risks; 6).
Discussion on the operation performance parameter; 6). Employment status of the company, including key managerial personnel; 8). Structure of the industry and development affecting Industries; and 9). Internal control systems and their adequacy.
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Along with the nine above disclosure points, further information to be disclosed in the MDA is: When they have a personal interest in a financial or commercial transaction that could potentially clash with the interests of the company as a whole, senior management must disclose it to the Board (e.g., dealing in company shares and commercial dealings with bodies, which have a shareholding of management and their relatives). Additionally, the company's website, which will be disclosed in the MD&A, must post the Code of Conduct for the Board of Directors and senior management.
Being such an important document, it becomes vital to study the MD&A practices followed by Indian companies in their annual report. Therefore, this study examines the current practices followed by the companies in their MD&A reports, specifically mandatory and voluntary disclosure. Thus, the evidence from the MD&A disclosures can help stakeholders assess useful information, and Regulatory authorities design more robust disclosure requirements. This study also explores the following research questions (Rq): Rq1. What kinds of MD&A disclosures are published and presented on corporate websites?; Rq2. Do MD&A disclosures follow a positive trend and patterns over the years?; Rq3. Is there any significant difference between the quantity and quality of MD&A disclosures?; Rq4. Do MD&A practices distinct across dimensions?; and Rq5. Do MD&A practices distinct by industry type?
The first two research questions are going to be answered with the help of the content analysis process. In it, it is checked how the information is provided in the MD&A report and whether companies are focusing on enriching the MD&A disclosures. Thus, trends and patterns of MD&A disclosures are studied. The next three research questions will be answered with the help of research hypotheses developed in the next section by considering the previous studies.
In this research, we collected and analyzed 204 MD&As of public companies listed on the National Stock Exchange (NSE) for 2016-2021. The content analysis technique is used to measure the quality and quantity of MD&A disclosures. An overview of general reporting practices followed by Indian companies in their MD&A studies. Along with it, the impact of factors like industry type and pandemic
187 (Covid) are also examined in the MD&A disclosures (which are mandatory to be provided) (Aggarwal and Singh, 2019; Ahn and Lee, 2004).
The findings of this study are relevant to academicians, stakeholders, and regulators. First, the study identifies that no uniform format is followed by the companies in MD&A reports, even within an industry. Thus, the amount of information provided by each MD&A head varies from company to company. The MD&A reports are mostly provided as a separate section of annual reports instead of the add-in to the directors’ report. They are also available on the corporate website, stock exchange website, and Ministry of Corporate Affairs. Second, a positive upward trend of the MD&A disclosures has been observed even after the pandemic.
Therefore, it is expected to rise soon also. Third, this research has significantly proven the difference in the MD&A disclosures' quality and quantity of the MD&A disclosures following the same result across nine dimensions. Fourth, this study supports the literature that factors, i.e., industry type, affect the MD&A disclosure level over a period of time. Fifth, this study also contributes to the literature by addressing the current practices followed by the companies where MD&A disclosures were recently adopted. In India and other underdeveloped countries like Malaysia, Indonesia, and Pakistan, this study is the first to discuss this dimension of research in the MD&A report, to the author's knowledge. Although, only current practices are extensively analyzed in this study after an investigation by Cole (1990)in the US at the time when MD&A disclosures were underdeveloped.
The remainder of the paper proceeds as follows: Section 2 discusses the studies related to the MD&A disclosures conducted worldwide, and Section 3 presents the research methodology used in this study. Section 4 discusses the empirical results, and Section 5 is the conclusion
2. Literature Review and Hypotheses Formulation
Due to numerous frauds and scams in the early 1960s in the United States, the need for additional disclosures was felt. The Securities and Exchange Commission (SEC) decided to introduce a document that can provide financial and non-financial
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information from the eyes of the management. Therefore, the notion of MD&A reporting evolved for the first time to bring more transparency to defend stakeholders' interests. Over the years, continuous improvements have been made in the MD&A reports by the Securities and Exchange Commission practices (SEC, 2019). From the management perspective, MD&A gives all relevant information related to the business, which is called the firm's overall disclosure package (Cohen et al., 2008; Fox, 2007). In 1980, a full-fledged MD&A report was mandated for the companies in the USA to provide in their annual reports. Although time to time, various committees were formed to evaluate the MD&A adoption, and improvements were made. In 1995, MD&A was successfully implemented by all the requisite companies there, and after getting positive results from the presence of MD&A disclosure in the annual reports in the USA, the United Kingdom, adopted the MD&A as “Operating and Financial Review (OFR)” and “Management Commentary” by International Accounting Standard Board.
Prior studies on the MD&A at the global level examined a) MD&A reporting and b) the relationship between MD&A disclosures and stock price forecast and determinants of MD&A disclosure quality. Cole (1990) analyses the format, length, environment, and segment information provided in the MD&A reports and concludes that most firms provide forward-looking statements. The content analysis of MD&A disclosures is used in various studies. Barron and Kile (1999) followed a four-point scale to measure the quality of MD&A disclosures. They advocated it as a more authentic measure tool as it provides more detailed information about the information provided in the MD&A reports. The MD&A report allows managers to communicate directly to the public about their future goals and strategic plans (Muslu et al., 2015), as investors need more forward-looking information than information on past events.
MD&A guides companies to present every material event, trend, plan, and uncertainty that can affect companies' resources and operations (Bochkay and Levine, 2019; C. J. Cole & Jones, 2005; Waymire, 2004) and help in predicting at least three years of bankruptcy of a firm (Mayew et al., 2015). Also, based on the information revealed in the MD&A, future cash flow and profitability can be
189 predicted. Hence it can be called a "firm's total disclosure package." (Clarkson, Kao, and Richardson, 1999; Mayew et al., 2015; Bochkay and Levine, 2019).
The next attempt in the study of MD&A is information content studies which check the relationship between MD&A disclosures and stock price forecasting. It is found that a firm's future operation and planned capital expenditure-related information are positively associated with the firm's future performance, investment decisions, and analysts' earnings forecasts (Bryan, 1997). Six measures were examined, and it was found that with the positive change in profitability, a positive tone is described in the MD&A reports. These results are also consistent with the other studies (Blanchard et al., 2004; Feldman et al., 2011; Singh and Singla, 2022).
A positive association is observed between the firm size and the quality of the corporate reports. Also, a positive association between firm age, profitability, and reports quality is observed as the older firm wants to maintain their reputation legacy, and more profitable firms are eager to disclose more in their reports (Cohen et al., 2008).
It has been observed that the MD&A reporting rates are high in the case of developed countries like the USA, the United Kingdom, and Canada. In Asian countries, researchers from developing nations like China, Indonesia, and Malaysia, have started to find the positive impact of MD&A disclosures in their research after adopting MD&A in their corporate annual reports (Alam, 2005; Mohamad and Rahman, 2006; Marchetti, 2018). However, in India, the concept of MD&A reporting is not a much older term, as all the listed companies have started reporting after the introduction of amendments in the Companies Act, 2013 and Listing Obligation and Disclosure Requirement (LODR), 2015 norms (Companies Act, 2013; SEBI, 2015). But none of the studies has examined the quality of MD&A disclosure in developing countries where MD&A is a new concept. Thus, it becomes important to check whether the actual practices followed by the companies in their MD&A reports are in the same manner as the regulations.
However, the study conducted by Srinivasan et al. (2014) and Jayasree and Shette (2020) investigated the readability of MD&A reports and found their
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association with the firm's features and malevolent external environment. But no study in India has been conducted so far on studying the practices followed by Indian-listed companies in their MD&A reports. The current study tries to fulfill this gap.
2.1. Studies related to MD&A reporting quality and quantity
For measuring the quality of MD&A disclosures, we have followed the 5 points scale used by previous researchers (Barron and Kile, 1999) for analyzing the quality of MD&A disclosures. Scores are assigned for the quantity of information presence (1) and absence (0) of the disclosure. The same kinds of methods for ascertaining the quality of MD&A disclosures have also been used in other corporate reporting practices (Aggarwal and Singh, 2019; Jain and Lawrence, 2016). The result of their study has shown a significant difference in the quality and quantity of sustainability reporting. Also, they have found that CSR and sustainability reporting practices are significantly different across the dimensions. Hence, this study investigates the difference between MD&A quality and quantity also, along with the dimensions, by developing the following hypotheses and deals with the Rq3 and Rq4:
H1: MD&A quantity and quality are significantly different.
H2a: MD&A quantity is significantly different by dimension.
H2b: MD&A quality is statistically different by dimension.
The implications of such research hypotheses will help understand the gap between the quality and quantity of MD&A disclosures and suggest filling this gap.
2.2. Studies MD&A reporting and Type of Industry
Another important factor that influences MD&A reporting is industry. In the previous studies, a strong positive association between MD&A disclosure quality and the industry type has been seen (Ahn and Lee, 2004; Clarkson et al., 1999; C. J. Cole and Jones, 2004; Efretuei and Hussainey, 2022; Goel and Sharma, 2015; Lin Zhang, 2014; Srinivasan et al., 2014). Also, a Study by Srinivasan et al. (2014) indicates that companies under a single industry do not have much separate effect on the economic environment in India. Thus, this study has attempted to investigate the impact of industry on the MD&A level of the companies in India and deals with the Rq5 by
191 developing the following hypotheses:
H3: MD&A reporting practices are distinct by type of industry.
H3a: MD&A reporting quantity distinct by type of industry.
H3b: MD&A reporting quality is distinct by type of industry.
The above hypotheses will help to understand whether the disclosure practices adopted by one industry are the same for all companies in that particular industry or different. Insight can also be gained as MD&A disclosure practices are significantly different across the corporate sectors and help provide better solutions for improving the quality of MD&A reports.
3. Research Methodology 3.1 Content analysis
Content analysis is a research technique that helps in analyzing qualitative information in a quantifiable manner, such as textual information provided in the reports and drawing inferences in quantitative terms against predetermined criteria.
(Eliza et al., 2022; Scaltrito, 2015). The researchers have coded the MD&A information from both qualitative and quantitative perspectives. The main items in MD&A reports are divided into sub-items to better understand the quality and quantity of the information disclosed.
To examine MD&A quantity, the availability of each item and sub-item is checked in the MD&A reports. A score of 0 (absence) or 1 (presence) is assigned to each item. Such a method of assigning one or zero to the items, whether disclosed on not respectively, is covered under thematic content analysis (Holder-Webb, 2007).
After getting the item-wise score, the total disclosure score for MD&A performance is calculated by employing the given equation:
…… (i)
Where nk is the highest expected score for every dimension of MD&A, k represents the company, and i is for the items. Thus, the score for each company regarding the quantity of MD&A disclosures is calculated as the actual score received divided by the maximum scores assigned.
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Further, to examine the quality of the MD&A disclosures, the disclosed items in the MD&A have been scored in a more elaborate form. Therefore, table 1 best explains the score assigned to the disclosed items based on information provided under each head. Value ‘1’ is assigned if the item is inadequately disclosed, ‘2’ for fair disclosed, ‘3’ for good disclosed, and ‘4’ as very good disclosed. Such analysis of the coding method has been previously used in various studies (Bhasin, 2010;
Zhang and Hui-yun, 2014). In ascertaining the quality of the disclosure, Xik assumes values ‘0’ to ‘4’ on a five-point scale.
Table 1.
MD&A reporting quality assessment scale
Score Criterion MD&A Quality
0 Omitted Disclosure Poor
1 Inadequate Disclosure Below Average
2 Fair Disclosure Average
3 Good Disclosure Above Average
4 Very Good Disclosure Excellent
Source: Author
After getting the scores for both the quality and quantity of the MD&A, various statistical techniques such as mean and standard deviation were applied to analyze the data and to test the research hypotheses; the t-test was applied.
3.2 Sample Size and Sources of Data
A total of six corporate sectors, i.e., automobile, IT, metal, oil& gas, Pharma, and consumer goods, were selected for the study as these sectors are showing outperforming growth in recent years in India. Thus, companies from these sectors belonging to the Nifty 100 index are chosen for this study. Therefore, the final sample consists of 53 companies from the selected sectors listed on the National Stock Exchange (NSE) for the period ending March 31, 2021, as shown in Figure 1.
MD&A reports of the companies have been obtained from their respective corporate websites for the period 2016-2021. The six years of the study have been chosen as listed companies in India got a mandatory MD&A disclosure in annual reports after introducing LODR 2015 norms.
193 A total of six corporate sectors, i.e., automobile, IT, metal, oil& gas, Pharma, and consumer goods, were selected for the study as these sectors are showing outperforming growth in recent years in India. Thus, companies from these sectors belonging to the Nifty 100 index are chosen for this study. Therefore, the final sample consists of 53 companies from the selected sectors listed on the National Stock Exchange (NSE) for the period ending March 31, 2021, as shown in Figure 1.
MD&A reports of the companies have been obtained from their respective corporate websites for the period 2016-2021. The six years of the study have been chosen as listed companies in India got a mandatory MD&A disclosure in annual reports after introducing LODR 2015 norms.
Figure 1.
Sample Description by Industry
Figure 1 describes the number of industries covered under the sample selected for this study. The highest contribution is taken by the Consumer Goods industry, with a 26% stake and followed by Pharma and automobile sector, with 19% and 17
%, respectively. The remaining stake is collectively covered by the other three IT, Metal, and Oil & Gas industries with an individual stake of less than 15%.
4. Results
4.1 Presence and Format of the MD&A Information
In terms of communicating MD&A disclosures (Rq1), approximately ninety- three percent of sample companies publish standalone MD&A reports. In comparison, only seven percent of companies provided the MD&A disclosures and
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the Director's report on their corporate websites. For presenting and publishing the MD&A disclosures, it has been observed that the MD&A report mainly starts with the industry structure and development affecting the industry by discussing the Macro and micro-economic factors affecting the industry globally and nationally.
However, a few companies that provided the MD&A section, along with the Director's report, started their MD&A report by discussing the company's financial performance. After that, this report comprises information mainly related to the segment information and performance, internal control system and its adequacy, financial performance and key ratios, Human resource, and other material information like risk and SWOT analysis. In the end, the last few lines tell about the cautionary statement provided by the company. Section 4.2 explains the information provided under each head in the MD&A report more elaborately.
4.2 Current MD&A disclosures provided by the Indian Companies 4.2.1. Industry Structure and Development Affecting Industry
In this head, the information about the global economy and the Indian economy is first discussed as to what is going on globally and in India. Then, an overview of the Global and Indian industry information and performance is discussed by the companies covering their respective industry. Lastly, detailed information about the business overview and its various products is discussed. This section is the second- highest space-covering column in the MD&A reports on average.
4.2.2. Outlook of the business
The sequence and the location of the outlook and other disclosures are not fixed in the MD&A reports. But in the outlook section, the company provides a brief overview of its current position and what will be its next target to achieve by looking at the macro environment variables. This helps to understand the plans and the direction of the company’s vision and mission. Any Investor can easily understand and predict the company’s future results from somehow perspective (Li, 2010;
Mayew et al., 2015). 95% of the companies have discussed market-industry outlook, 75% of companies discussed the commitment/planned expenditure, while 32% show the known trends and uncertainty in their forward looking-information. These results
195 are consistent with the previous study conducted by Cole (1990). The following statements describe the forward-looking information presented by various industries in their MD&A reports:
Selected industries gave Forward-looking Information Automobile
Long-term R&D, Improvement in Immediate and short-term supply of semiconductors rise pandemic, Government Schemes such as PLI (product linked initiative), focus on electric vehicles to help in double-digit growth.
Pharmaceutical and Healthcare
Government aids in more research on Pandemic-19 vaccines; Government supported PLI schemes, Rising lifestyle and diseases, better access to healthcare,
Oil & Gas
Diversifying crude oil supply strategically, large pent-up demand for motor vehicles Metal
The rise in investment this year, as compared to the previous year, 2020, focus on the uninterrupted supply of ore to the industry; Atamnirbhar Bharat schemes enhance overall output.
Consumer Goods
Strong distribution system focusing on new growth engines
4.2.3. Employment status of the company, including key managerial personnel Only half of the studied companies (56.1%) have provided a detailed discussion on the human resource that they acquired & the facilities provided for their learning and development to enhance their products, such as training, a good working culture, talent acquisition, talent management, health & safety of the employees, satisfaction enhancement, and the number of employees are working for their company and many more. Another set of sampled companies (25%) has focused on this with a brief overview of human resources, such as human resource diversity, industrial relations, and the number of employees. The remaining 28% of the companies have not provided any column for the human resource in their MD&A report provided in
196 India.
4.2.4. Performance breakdown, either segment-wise or product wise
This is the lengthiest and most highly focused column provided by almost all the companies in their MD&A reports. A piece of fully detailed information is provided about the primary as well as secondary business segments. The information and performance of every product are fully described. Also, exports of the units are mentioned by showing the previous year's company's segment performance for easy comparison. For the last year, the sale did not possibly achieve the previous target due to the Pandemic-19. The benefit of this point is that one can easily understand the comparative segment-wise performance of the company and make a better decision.
4.2.5. Discussion on the operation performance parameter
This section discloses all the financial performance-related information, including income statement, Balance sheet, cash flows, dividend payout, investment surplus, different costs, working capital, taxes, and depreciation. This is the highly demanded part of the annual report. But it is not required that all the companies provide all the financial performance parameters in their MD&A reports. But most companies (95%) have discussed the various financial performance parameters in a consolidated format. Only 2% of the companies have not provided any financial performance-related information in their MD&A section. At the same time, the other 3% have provided both standalone and consolidated financial statements.
4.2.6. Key ratios showing the financial position and performance
This is the vital section provided by 90% of the companies. This section got more attention after the 2019-2020 financial year. Only 8% of the companies in the current financial year (2020-2021) have not discussed the key ratios of their companies. A few ratios are discussed in this section by almost all the companies a).
Debt turnover, b). Inventory turnover, c). The interest coverage ratio, d). the current ratio, e). the debt-equity ratio, f). operating profit margin, g). Net profit margin, and h). Return on net worth
197 4.2.7. Key risks and steps to mitigate those risks
Although the information about the risks that companies face and their risk management is provided by 80% of the companies, which is comparatively low compared to other important sections, it is the third most space-covering column in the MD&A reports by the companies in India. However, the risks perceived and their risk mitigation plans vary among companies and industries. However, a few common risks that almost all companies face are foreign currency, market, inflation, price, and cyber security.
4.2.8. A SWOT analysis of the business
This section is the least discussed section in the MD&A reports. Only 46% of the companies have disclosed a full or a part of the SWOT analysis in MD&A.
However, looking at the importance of SWOT analysis, it becomes essential to provide a full SWOT by the companies. But companies have mainly focused on the two aspects, i.e., Opportunities and Threats only.
4.2.9. Internal control systems and their adequacy
In this section, the companies (68%) provide that all the information provided here is checked by their authority, including auditors, and they are following a proper mechanism to ensure all the information disclosed is true and in favor of the public.
This section is provided in the last of the MD&A report.
4.3. Hypotheses testing related to MD&A disclosures 4.3.1. Quality and Quantity of the Disclosures
Figure 2 presents the positive trends of the MD&A disclosure in terms of both quantity and quality (Rq2). The major difference in the two lines arises in 2018 and 2020 when the level of disclosures rose but not the quality. The reason behind that could be uncertainty regarding the future results among the industrialist and the stakeholders.
In 2018, there could be the impact of Goods and Service tax (GST) implementation in India for the first time in July 2017, while in 2020, the pandemic created much trouble and a doubtful situation for the future of the businesses observed directly. But, in 2021, the quality of the MD&A reports is rising more than
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the level of MD&A disclosure, showing positive reforms in the MD&A reporting practices. This indicates the rising importance of MD&A in corporate reports.
Figure 2.
Trends of MD&A Disclosures
Source: Author Table 2.
Descriptive statistics
Particulars MD&A quality (%) MD&A quantity (%)
Mean 57.18 79.62
Median 0.14 82.6
Minimum 16.66 39.13
SD 1.7 0.12
Maximum 86.11 100
Source: Author Table 3.
One sample t-test for MD&A quality and quantity
t-test
t df
Sig. (2- tailed)
Mean Difference
95% Confidence Interval of the Difference
Lower Upper
Quality 26.240 8 0.000 57.77778 52.7002 62.8554
Quantity 28.000 8 0.000 79.33333 72.7997 85.8670
Eta square 1.61
Source: Author
Table 2 describes the descriptive statistics of the quality and quantity of the MD&A disclosures. The mean score of the MD&A quality is lower than the MD&A quantity. Further, in Table 3, when the t-test is applied, the results present a significant difference in the MD&A quality and quantity at p=0.00, showing the
199 acceptance of hypothesis H1. Moreover, the effect size is larger, more than 0.7 (Cohen's d = 1.61), implying a large effective gap in the MD&A quality, which is considerably less than the MD&A quantity. Therefore, our Rq3 is answered as there is a significant difference in the quality and quantity of MD&A reports provided by the Indian Companies and supported by past research (Aggarwal and Singh, 2019;
Jain and Lawrence, 2016).
4.3.2. MD&A reporting differences by sub-categories/dimensions
Among the nine MD&A reporting dimensions, Key risks and mitigation of risks and key ratios disclosures are the best (probably improved after the pandemic) in quantity, while SWOT analysis discourse is the poorest in quality and quantity, as shown in Figure 3.
Figure 3.
Average MD&A scores for various sub-categories
Source: Author Table 4.
Independent sample t-test of MD&A quantity and quality by dimension
Levene test F t df Sig. (2-tailed)*
Equal variances assumed 0.548 -6.007 16 0.000
Equal variances are not assumed. -6.007 15.081 0.000 Source: Authors’ own calculation, * 5% significance level
The quality and quantity of MD&A vary significantly between dimensions (p = 0.00), as shown in Table 4. Therefore, the second hypothesis, H2, stands true and is consistent with the study by Aggarwal and Singh (2019). Our Rq4 is satisfied by
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explaining that MD&A practices are different by the dimensions. Hence, it is suggested to equally focus on each dimension of the MD&A report to enhance its quality.
4.3.3. MD&A Reporting and Industry-type
A comparison is made industry-wise on the information disclosed in MD&A reporting In Table 5. It is visible from the score obtained by various industries that the highest-scoring industry is the consumer service industry, followed by telecommunication. And the least-scoring industry is consumer goods.
Table 5.
Industry-wise practices of MD&A disclosure (fig in %)
Industry 2021 2020 2019 2018 2017 2016 Average Ranking
Automobile 59 56 58 52 54 55 55.67 3
Consumer Goods 50 47 48 45 45 43 46.33 6
IT 56 62 65 59 61 59 60.33 2
Metals 58 59 57 47 53 51 54.17 4
Oil & Gas 63 60 64 59 60 57 60.5 1
Pharma 54 47 54 48 49 46 49.67 5
Source: Authors Table 6.
Levene's Test of Equality of Error Variances,b
MD&A score Levene Statistic df1 df2 Sig.
Based on Mean 6.39 14 15 0.00
Based on Median 4.28 14 15 0.00
Source: Authors, *a dependent variable: MD&A score, b Intercept + industry
The figures in Table 5 depict that the MD&A disclosure quantum of the industries is below seventy percent, and the need to disclose more information specifies the regulatory authorities for the sake of the public. Table 6 shows significant differences in the MD&A disclosures among industries (p = 0.00). Thus, the third hypothesis, H3, is fully supported and consistent with the results of the previous studies (Goel and Sharma, 2015; Srinivasan et al., 2014) that MD&A disclosures vary from industry and industry to industry and answer Rq5. This finding
201 indicates that a standardized framework for MD&A disclosure is required to bring uniformity in the MD&A disclosures across different corporate sectors.
5. Conclusion, Implications, and Limitations
The current study is a minimal effort to evaluate the MD&A reporting practices of Indian corporates consisting of a final sample of the top 53 listed firms from the Nifty 100 index for six years from 2015-16 to 2020-2021.
This study finds that the quantity and the quality of MD&A disclosures are 79%
and 57%, respectively, which is unsatisfactory. Indian companies are disclosing a lot of substantial items in their M&A reports. But the adequacy of the disclosed information still needs to be improved to make better stakeholder decisions. The study's findings support all the hypotheses, which indicates that the quality and quantity of MD&A reports depend on the factors associated with the firms and the management. It is found that almost sixty percent of companies from the selected sectors in India are publishing their MD&A with “above average” quality.
Further, a positive trend in the quality and quantity of MD&A discourse has been observed. Although the pandemic and implementation of GST Norms have impacted the MD&A disclosure's quality and quantity, in the latest year, 2021, a positive sign of MD&A disclosures by Indian corporations is observed and expected to rise in the near future. This indicates the rising importance of MD&A in corporate reports. A significant difference between MD&A quality and MD&A quantity and the different MD&A dimensions is also seen. These results are consistent with the results of the previous studies (Aggarwal and Singh, 2019). Hence, it is suggested to equally focus on each dimension of the MD&A report to enhance its quality. It possibly depends on the management's discretion in disclosing the items. Risk and concern, segment information, and financial information categories are given much importance, while SWOT analysis also received less attention in the case of quality and quantity. Thus, it is necessary to equally focus on every item required to be disclosed in MD&A reports to gain more acceptance from the public and society at large.
202
Also, MD&A disclosures are provided differently by the different corporate sectors, representing that MD&A disclosures vary within and from industry to industry. This finding suggested to the regulators, to develop a standardized framework for MD&A disclosure is required to bring uniformity in the MD&A disclosures across different corporate sectors, resulting in fully disclosed MD&A disclosures with a maximum narrative quality (Al-Kalbani, 2008; Goel and Sharma, 2015; Srinivasan et al., 2014) It is up to the management of the companies also to provide better MD&A disclosures and stand firm in adverse situations and maintain the trust of the stakeholders in the business.
The target audience for this work is academicians, but business or financial analysts may also find the tool beneficial. The current study has broad implications for businesses, professionals, decision-makers, and stakeholders. In the USA, the MD&A disclosure is more advanced as the disclosure requirements are more demanded by the stakeholders there. As gradual awareness about the MD&A disclosures will create and spread among Indian stakeholders, the demand for such disclosures will also rise. Hence, it is recommended that Indian companies proactively provide better disclosures in their MD&A reports and incorporate them to bring uniformity in the MD&A disclosures at the global level.
Overall, the study's conclusion shows the companies' positive approaches toward MD&A. Also, it indicates the interest of the stakeholders in the MD&A reports, therefore, contributing to the enhancement of MD&A disclosures. In India, the management should focus on improving the quality of the information disclosed to protect and safeguard the interest of the investors, and it is the duty of the stakeholders, too, to demand more relevant information in the MD&A from the companies as well. Along with it, regulators should also regularly focus on the effective implementation of their norms by Indian corporates. Regulators in India, such as SEBI, must check continuously on the MD&A disclosure practices followed by the Indian companies, and more focus should be laid on the increase in information under MD&A disclosures. Our findings also reveal that regulatory pressure and a legitimate approach to MD&A reporting are the driving factors for
203 corporations in India, and a lack of consistency in MD&A formats is also observed.
Thus, it requires a uniform standard in MD&A reports making consistency and trust ability in the stakeholders.
The results of the study are fruitful for the shareholders of other countries where a similar set of MD&A norms are adopted. Also, this research contributes to the accounting literature and motivates other developing nations, like Indonesia, Malaysia, and China, to check the disclosure practices adopted by the companies there.
As with other studies, this study also has limitations, and there are suggestions to overcome those limitations. First, it is essential to note that the results of the current study are only based on self-reported disclosures made by firms in the public domain. They might or might not represent the company's actual performance.
Hence, those should be evaluated with caution. Second, the current study focused on evaluating the quantity and quality of MD&A disclosure. But, it was beyond the domain of this investigation to establish their accuracy. Thus, a pooled data study should be conducted in future studies to examine how MD&A is related to profitability and other company attributes. Third, a cross-sectional study can be performed by analyzing various nations' MD & A reports to provide vital insights into MD & A concerns.
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207 Appendix
Table A.
MD&A quality score
Industry 2021 2020 2019 2016 2017 2016 Average
Automobile 59 56 58 52 54 55 55.67
Consumer Goods 50 47 48 45 45 43 46.33
IT 56 62 65 59 61 59 60.33
Metals 58 59 57 47 53 51 54.17
Oil & Gas 63 60 64 59 60 57 60.5
Pharma 54 47 54 48 49 46 49.67
208 Table B.
MD&A quantity score
Company 2021 2020 2019 2018 2017 2016
Abbot India 31 31 30 29 29 29
Alkem Laboratories 25 25 25 22 22 22
Apollo Hospitals 25 25 25 22 22 22
Asian Paints 34 35 35 32 31 31
Aurobindo Pharma 32 32 32 29 28 24
Bajaj Auto 22 23 23 19 18 17
Berger Paints 31 31 29 25 25 25
Bharat Petroleum 28 28 28 25 25 21
Biocon Ltd. 28 28 28 25 25 25
Britannina Industries 22 22 22 19 19 19
Cadila Healthcare 25 25 28 28 28 27
Cipla Ltd. 32 32 32 30 30 28
Coal India Ltd. 34 34 34 35 35 35
Colgate Palmolive Ltd. 23 21 20 16 16 16
Dabur Ltd 30 30 30 29 31 31
Divi Lab 33 33 33 30 30 30
Dr. Reddy's Laboratory 33 33 32 32 32 30
Eicher Motors 23 24 24 21 23 23
Godrej Industries 25 25 22 19 20 20
HCL Technology 32 33 33 30 29 29
Havelles India 28 28 22 22 20 20
Hero Motor cop 34 33 24 23 27 30
Hindustan Petroleum 33 33 33 31 31 31
Hindustan Unilever 31 30 31 29 31 31
ITC Ltd. 28 25 25 25 25 26
Indian Oil Corporation 34 35 35 35 34 30
Indraprastha Gas Ltd 27 27 27 37 30 31
Infosys Ltd. 38 37 34 30 27 27
JSW Steel 37 37 36 36 32 33
MRF Ltd. 32 31 29 29 27 27
Mahindra & Mahindra 32 32 32 26 27 27
Marico Ltd. 30 30 29 27 30 37
Maruti Suzuki India Ltd. 31 31 31 29 29 29
Mothersome Sumi system Ltd. 31 31 32 29 30 30
ONGC 30 30 30 27 26 26
Reliance Industries 30 30 30 30 30 30
Sun Pharma 29 32 30 27 27 27
TCS 34 32 30 30 35 36
Tata Consumer 38 38 37 34 35 34
Tata Motors Ltd. 36 36 26 35 37 37
Tata Steel 31 31 31 25 24 22
Tech Mahindra 29 29 30 26 27 27
Titan Company Ltd. 19 24 24 24 34 24
Torrent Pharma 25 24 24 27 22 22
United Breweries 19 18 18 15 15 15
United Spirits 28 28 28 22 22 25
Vedanta Ltd 20 20 18 19 21 21
209
