Linguistic Tone of Municipal Management Discussion and Analysis Disclosures and Future Internal Control Quality

We investigate relations between the textual content of municipal disclosures and future internal control quality. Specifically, we examine whether the linguistic tone of municipal management discussion and analysis (MD&A) disclosures is associated with the likelihood of future internal control weaknesses. Using a sample of 362 municipal MD&A disclosures in fiscal year-end 2011, our empirical analysis suggests that positive (negative) tone in municipal MD&A disclosures is associated with fewer (more) subsequent year internal control weaknesses after controlling for other governance, demographic, and performance factors. Overall, our findings suggest that language in municipal MD&A disclosures plays an important role in signaling confidence in financial reporting systems, indicating that MD&A content contains important information in predicting the quality of future municipal financial reporting.