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How Strategy Talk Creates Value

Traditionally, CEO strategy presentations are derided as little more than “cheap talk.” After all, it doesn’t cost much to rent out that conference room, set up the video link, and paint a grand vision of the firm for investors and the press. Real strategy is decided behind closed doors, the thinking goes.

What’s more, sometimes these presentations are viewed as a ruse to throw off rivals by laying out an agenda the CEO has no intention of fulfilling. In this sense, strategy presentations have been compared to “vaporware” announcements, in which companies claim to be developing something that they aren’t in order to compel competitors to commit resources to a phony war.

But devising a strategy and selling it to investors is perhaps the key componentof a CEO’s job. Some researchers have suggested that failing to follow through on promises, even vague ones, can do serious damage to a CEO’s reputation down the line, which can, in turn, send stock prices tumbling. These high stakes might give companies a reason to take strategy presentations more seriously. So might the trend toward transparency in business — researchshows that one in five Fortune Global 500 companies gives strategy presentations in any given year.

According to a new study, more companies might want to follow their example. The conventional wisdom that views strategy presentations as little more than window dressing is seriously misguided, the authors found — at least when it comes to presentations made by new CEOs. The strategy presentations these CEOs make in the months following their appointment seem to soothe investors’ uncertainty, and tend to provide an immediate and significant boost to the firm’s stock price. “In this sense, contrary to skepticism from theorists of cheap talk, investors see strategy presentations as credible and economically significant,” the authors write. “Strategy talk matters.”

The authors analyzed new CEOs because their appointment is typicallyregarded as a moment of strategic change, when setting out a vision for the firm’s future provides investors with their first real indication of the priorities of the new person in charge. These strategy reviews also give investors a chance to assess the new CEO’s charisma, competence, and experience up close.

The authors obtained data on strategy presentations carried out by companies listed on the NYSE and Nasdaq from 2000 to 2010. To isolate the effects of CEO presentations, they eliminated firms that also issued announcements about dividends, earnings, mergers and acquisitions, major contract awards, lawsuits, or new products within a three-week period around the time of the strategy review. They also controlled for other relevant factors that could skew the results, such as firm size, stock-price volatility, and the number of analysts following a company.