LA ESTRUCTURA CURRICULAR Y/O DISEÑO CURRICULAR

In addition to the inherent operational characteristics and properties of mandatory financial reports associated with strategic types, corporate strategy can influence firms’ voluntary disclosure decisions, and in turn, affect analysts’ decision to follow the firm. Bentley-Goode et al. (2017) find that Prospectors issue more frequent management earnings guidance and press releases and receive more press and analyst coverage. They argue that Prospectors are more willing to make voluntary disclosure than Defenders because of their greater reliance on external financing to fund market expansion. This,

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combined with higher ex ante information asymmetry implies that, Prospectors have greater incentive to disclose information voluntarily in order to reduce firm’s cost of capital (Bentley-Goode et al. 2017).

In addition to correlations with financing requirements, Miles and Snow’s (2003) strategic types can affect the structure of firms’ management compensation plans (e.g. Ittner et al. 1997, Rajagopalan 1997, Singh and Agarwal 2002, Bentley et al. 2013 and Bentley-Goode et al. 2017). This observation, combined with evidence that management compensation plans affects firms’ incentives to provide voluntary disclosure, and thus, the number of analysts that follow a firm (e.g. Lang and Lundholm 1996 and Nagar et al. 2003), suggests a further connection between strategy and analyst coverage, which I explain in more detail below.

Miles and Snow (2003, p.28) suggest that firms’ success relies on the consistency between the corporate strategy employed and the organisation structure and processes developed. This implies that corporate strategy determines how managers should design their organisational structure and processes, which includes the design of the management reward system. For example, Prospectors are more likely to invest in innovative projects which are subject to high outcome uncertainty and may take a long time to achieve the expected returns. This requires the design of incentive plans to encourage risk taking and allow a longer-term horizon to yield positive returns (Rajagopalan 1997). Therefore, Rajagopalan (1997) and Singh and Agarwal (2002) suggest and find that Prospectors who employ a long-term, stock-based incentive plan (e.g. stock options) are associated with better performance than firms who claim to follow a Prospective strategy, but fail to have a consistent incentive plan to facilitate their business activities (e.g. Reactors).

Conversely, Miles and Snow (2003) suggests that Defenders are less focused on growth and expansion and pay more attention to production efficiency. This implies that

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Defender’s operations are associated with lower outcome uncertainty and higher likelihood to obtain positive returns in short horizon. Therefore, Defenders are relatively likely to use accounting-based performance measures and cash bonus in their management compensation plans to stimulate firm performance (Rajagopalan 1997). Prior disclosure literature suggests that the design of management compensation plans impacts firms’ incentive to provide discretionary disclosures (e.g. Noe 1999 and Nagar et al. 2003). Nagar et al. (2003) suggests the use of stock-based incentives elicit both good news disclosure (to boost stock price) and bad news disclosure (to avoid investor penalties on silenced and potential litigation costs) of the firms. Therefore, Prospectors’ use of stock-based compensation plans will increase their incentives to make discretionary disclosures, while Defenders’ use of accounting-based compensation plans should lead to lower disclosure.

Additionally, corporate strategy may affect firm’s voluntary disclosures through product visibility effects. Miles and Snow (2003) suggests that Prospectors tend to invest heavily in marketing to promote their new products and services. One way of increasing product visibility is through frequent press releases (Bentley-Goode et al. 2017). On the other hand, the need for Prospector to increase product exposures attract external press coverage as management are likely to voluntarily provide information through internal disclosure mechanisms like to ones discussed above (Bentley-Goode et al. 2017). This implies that Prospectors may also be more willing to provide further explanation and engage in a greater amount of communications in response to analyst and investor queries than are Defenders, who have a relatively fixed product range that is likely to be better understood by the market.

In summary, firms with more innovative strategies have stronger incentives to provide discretionary disclosures because of: 1) a greater demand for external financing (Bentley-

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Goode et al. 2017), 2) a greater use of market-based management compensation plans (Rajagopalan 1997) and 3) a greater need to increase product visibility (Bentley-Goode et al. 2017). Further, prior analyst literature documents that firms’ willingness to provide discretionary disclosures affects the analyst coverage decision through both demand and supply effects (e.g. Diamond 1985, Lang and Lundholm 1996 and Botosan and Harris 2000). First, frequent discretionary disclosures attract analyst coverage by reducing analysts’ task complexity (the ‘supply’ effect). For example, Lang and Lundholm (1996) find that analysts prefer to follow firms with more forthcoming voluntarily disclosure and direct investor communications. Therefore, Prospectors, who are more likely to make more frequent discretionary disclosures, should attract greater numbers of analysts than all other firms, because the voluntary disclosures reduce analysts’ task complexity. Conversely, Defenders, who are less likely to make voluntary disclosures, should receive the lowest coverage. On the other hand, Diamond (1985) models firm’s disclosure function and suggests that greater volume of firm disclosure reduces information asymmetry. This, in turn, reduces analyst incentives to acquire and process private information and leads to lower coverage. If this demand effect dominates, Prospectors should experience a lower level of analyst coverage than all other firms.

The following table summarises the predictions for the ‘demand’ and ‘supply’ effects on the analyst coverage decision under the strategic impact of discretionary disclosures (‘DD’). As discussed above, Prospectors should be associated with more frequent discretionary discourses, which leads to lower demand and lower analyst following, but also lower cost of supply, increasing analyst coverage. Conversely, Defenders should be associated with lower frequency of discretionary disclosures, which suggests a high

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value-added effect and thus higher demand and coverage, but also high task complexity which discourages analyst following.7

Strategic Impacts Discretionary Disclosure (DD) on Analyst Coverage Prospector

(High DD)

Low Demand -ve Coverage

Low Supply Cost +ve Coverage Defender

(Low DD)

High Demand +ve Coverage

High Supply Cost -ve Coverage