Talking the talk : an empirical investigation into the economic effects of strategy disclosure

Abstract

What is the economic value of strategy? Although the extant literature in strategic management has explored many different theories of the firm, the research field has centered on an underlying consensus that strategy is an important driver of corporate performance, and thus holds significant economic value. By extension, if we assume efficient markets, the disclosure of such important information should be reflected in the firm market value. Building on these assumptions, our paper will attempt to identify the economic effects of strategy by examining the impact of strategy disclosure in annual reports on the firm market value. By performing an event study structured around the release date of corporate annual reports for Norwegian listed firms, this study aims to isolate the financial effects from changes in strategy disclosure quality, represented as the presence of abnormal returns in the event period. To test this relationship, we used a selfconstructed score to represent the quality of strategy disclosure by measuring the informational value across several important strategic dimensions presented in the corporate annual reports. Subsequently, we used the disclosure quality of prior years to establish the investor expectations for strategy disclosure, allowing us to investigate the impact of information “shocks” on security price returns. Our findings show that the disclosure of strategically important information indeed holds economic value, finding significant abnormal returns, and thus increased firm market value, for positive changes in strategy disclosure quality. Further testing of single dimension effects, however, were less conclusive. This can indicate that, while investors value revelations on corporate strategy overall, disclosure on single dimensions are less valuable due to their potential lack of context. Despite this, our results clearly show that there are substantial economic gains from increasing reporting quality on corporate strategy, encouraging further study of this important, yet partially neglected, area of research.