Annual Report Commentary on the Value Creation Process

We measure annual report commentary articulating entities’ business model and strategy, and then examine the capital market effects of enhancing such disclosure. Our empirical disclosure proxy is based on n-grams drawn from popular strategy textbooks and the academic strategy literature. Validation tests confirm that our score: (a) correlates with manual classifications of the quality of strategy-focused disclosures produced by domain experts; (b) covaries predictably with firm-level drivers of strategy-focused disclosures identified by prior research; and (c) captures the structural break in reporting associated with the regulatory mandate for a subset of London Stock Exchange firms to explain their strategy and business model. Tests using this exogenous and measurable increase in strategy-focused disclosure show that enhanced commentary on strategy and business model is associated with lower investor uncertainty. We also find support for an increase in the speed at which information is incorporated into stock price following the annual report release.