Manager sentiment and its effect on corporate innovation

Abstract

Identifying the factors that predict managers’ commitment to innovation is crucial for understanding firm growth and competitiveness. However, the impact of the textual tone in financial reports on corporate innovation is relatively understudied. This study investigates whether manager sentiment, captured through the textual tone in the Management Discussion and Analysis (MD&A) section of annual financial statements, helps predict firm innovation. Using data from China’s listed firms during 2003–2017, we provide robust evidence that manager sentiment is positively associated with corporate innovation, particularly for firms with low growth, low liquidity, low profitability, high distress, and state-owned enterprises. Our analysis shows that this relationship operates through increased institutional ownership, reduced capital costs, and improved access to external financing. These findings highlight the value of MD&A textual tone as a tool for stakeholders to assess a firm’s future innovation potential and competitiveness.