Strategy, Valuation, and Forecast Accuracy: Evidence from Italian Strategic Plan Disclosures

Abstract

Using a sample of 264 strategic plan presentations by Milan Stock Exchange firms during 2001-2012, we present evidence of both security price reactions and increases in the accuracy of analysts’ earnings forecasts pursuant to plan disclosure. In the cross-section, the information content of the plan disclosures and the accuracy increase are incrementally associated with the extent of forward-looking narrative disclosures in the plan after control for other disclosures within and outside of the plan presentation and the fact that the firm has self-selected into the sample. Both quantitative and qualitative narrative disclosures are informative to investors and analysts. The results are driven by narrative disclosures about company strategy and action plans rather than about the business environment in which the company operates. Our study informs the current debate on the use of voluntary comprehensive, integrated, long-run-oriented strategic plan disclosure as a potential replacement for disclosures such as quarterly earnings forecasts that have been described as an example of “short-termism”.

Keywords: Analyst forecast accuracy, Investor belief revisions, Strategic plan presentations, Forward-looking disclosure

JEL Classification: M41, G14