Does MD&A tone influence stock returns? Roles of R&D investment and digital transformation

In recent years, there has been a rise in research on the economic consequences of Management Discussion and Analysis (MD&A) tone. However, the effectiveness of MD&A tone and the internal mechanism between MD&A tone and economic consequences have not yet been thoroughly researched. Based on signaling theory, this study investigates how MD&A tone affects stock returns in the context of digital transformation and further explores the internal mechanism between MD&A tone and stock returns. This study uses text analysis methods to quantify the extent of a company’s digital transformation and MD&A tone. Empirical results on 4,723 Chinese companies from 2007 to 2019 demonstrate that MD&A tone positively influences R&D investment, thereby increasing companies’ stock returns. Moreover, digital transformation has a positive impact on the effectiveness of MD&A tone. The higher the degree of digital transformation, the stronger the positive impact of MD&A tone on R&D investment. This study enriches the related research on MD&A tone and provides ideas for further exploring the impact of digital transformation.