A Textual Measure of Business Strategy

This paper uses text parsing analysis on managerial self-disclosure in regulatory Form 10-K and develops a three-dimensional measure of business strategy for a large sample over 22 years. To ensure content validity, we draw the keyword list from prior literature. Adding to the face validity of the three-dimensional measure, we show that the measure exhibits substantial variation across and within industries and changes over time in responding to economic shocks. We also observe an overall persistent trend of the measure, indicating that the measure has high test-retest reliability. Further, we examine construct validity and find that the measure behaves as theory predicts. We find evidence that different strategies imply different resource allocation to strategic investments, affect important earnings properties and accounting policies, and have different implications on firm performance.