Listed Companies: Strategic Information Disclosure Is a Market Mover

RESEARCH BY ANTONIO MARRA AND COLLEAGUES SHOWS THAT WHEN STRATEGIC PLANS ARE DISCLOSED STOCKS MOVE 8% MORE THAN AVERAGE AND THE ACCURACY OF ANALYSTS' EARNING FORECASTS IMPROVES BY 14%

When listed companies release strategic plans, market reaction is strong and the accuracy of analysts’ earning forecasts improves. Antonio Marra (Department of Accounting) and co-authors Stephen Baginski (University of Georgia), Saverio Bozzolan (LUISS) and Pietro Mazzola (IULM) measure both market reaction and forecast accuracy in Strategy, Valuation, and Forecast Accuracy: Evidence from Italian Strategic Plan Disclosures (forthcoming in European Accounting Review).
 
Using a sample of 264 strategic plan presentations by Milan Stock Exchange firms during 2001-2012, the authors reckon abnormal returns of 8% pursuant to plan disclosure and a 14% increase in the accuracy of analysts’ earning forecasts.
 
“Abnormal return is the deviation of the stock price from the expected, average performance and is a signal that the market reacts to this kind of voluntary disclosure. It may be a positive or a negative reaction, but in any case it’s significant”, Prof. Marra says. “And the increase in forecasts’ accuracy means that the market makes good use of the disclosed information”.
 
Not all information is born equal, anyway, and Marra and colleagues observe that strategic information and action plan information are market movers, while business environment information is not considered as relevant. The more exact and more organized released information is, the higher are abnormal returns and analysts’ accuracy.
 
Strategic plan presentation is an Italian-only feature and one of the few cases of voluntary disclosure of long-term information not initiated by information users but by listed companies. “In Anglo-Saxon markets”, Prof. Marra continues, “earning announcements, press releases and conference calls are considered too short-term-oriented compared to investors’ information demand, while in investor days and corporate presentations (usually solicited by sponsors such as analysts or professional investors) companies release long-term information, but in a unstructured way. Strategic plans presentations in Italy are voluntary, but regulated: companies are free to release them or not, but if they do they have to follow Milan Stock Exchange’s guidelines”.
 
“Strategic information disclosure results more value-relevant than expected”, Prof. Marra says, “and from this relevance stem important managerial implications”.
 
First of all, the results of the study highlight that strategic plans are interesting structured vehicles to convey relevant information to markets and managers should seriously consider the possibility to release them.
 
Second, during the presentation managers must avoid cheap talk, which has no consequence, and focus on detailed and credible information.
 
Third, if the effect of the presentations is so strong in an environment like Italy, where legal enforcement is considered weaker and cheap talk could come easier than elsewhere, chance is that the effects would be even stronger where credibility is higher.

by Fabio Todesco