Financial Communication of Promises and Results: An Empirical Analysis of Disclosure Integration

Abstract

There is a consensus that forward-looking disclosure is essential in order to support present and potential investors in their decision-making needs. Corporate financial prospects are mainly disclosed on a voluntary basis, leading to different common practices (in terms of documents and time horizon) from country to country.A large literature has focused almost exclusively on short-term forward-looking disclosures (earnings announcements), which are widely used by listed companies to meet investors’ demand. The present paper shifts the focus on a longer time-horizon in forward-looking disclosure through the analysis of the strategic plan, where listed companies provide very useful information on management's plans, financial forecasts, opportunities, and risks.The topic is investigated in order to improve our understanding of the strategic plan role within corporate financial communication and its connection with periodic mandatory disclosure. Clearly, information availability is not the only issue from a users’ point of view. Some firms, particularly the larger ones, already provide all the information that users need, but many of them provide it in a variety of ways rather than in a comprehensive, integrated format.In such a perspective, the primary purpose of this paper is to explore the connection between strategic plans and annual reports, with particular reference to continuity and comparability of information disclosed through different documents. The study is based on the idea that it is essential that forward-looking disclosure is integrated with data published in annual reports. In such a perspective, integration is reached when investors are able to verify whether the previously disclosed strategic and financial targets has been hit.In pursuit of that objective, the paper advances a proposal for an index to measure integration between forward-looking and past financial disclosures, based on the comparison of data released in strategic plans and in the following annual reports. We posit that financial data published in mandatory reports which is directly comparable to forward-looking information contained in previous strategic plans is an indicator of integration between documents.We examine the topic focusing on the integration of quantitative data disclosed over a five-year period (2004-2008) in the Italian context, which is a very interesting setting due to the wide use of strategic plans.Additionally, we investigate the determinants of integration between disclosures of forward-looking information and results released in annual reports. The analysis is based on a review of empirical literature and takes into consideration four potential explanatory factors: firm size, information asymmetry, proprietary costs, and firm performance.