Does Business Strategy Impact a Firm's Information Environment?

Abstract:     
Using organizational theory, our study examines whether a firm’s business strategy impacts their information environment. On the one hand, organizational theory suggests that firms following an innovation-oriented Prospector strategy are more likely to have attributes typically associated with information asymmetry (e.g., R&D and growth options) relative to industry peer firms following an efficiency-oriented Defender strategy. However, Prospectors are also hypothesized to have greater incentives to mitigate information asymmetry relative to Defenders, thus reflecting the complex interrelationships that a firm’s strategy may have on their overall information environment. We find that Prospectors are associated with significantly lower levels of information asymmetry relative to Defenders. We then examine several mechanisms that may explain why Prospector firms exhibit less information asymmetry than Defender firms. We find that Prospectors are associated with higher levels of analyst and business press coverage, and issue more frequent voluntary disclosures compared to Defenders. We conclude that although Prospectors have inherent firm-level attributes associated with information asymmetry (e.g., R&D and growth options), incentives and mechanisms exist that allow firms following this strategy to mitigate this information asymmetry. Overall, our results suggest that business strategy does impact firms’ information environments.

Number of Pages in PDF File: 37

Keywords: business strategy, information asymmetry, information environment

JEL Classification: D21, D80, L21, M41

working papers series