FORMAL STRATEGIC PLANNING, INFORMEDNESS AND FIRM PERFORMANCE: AN EMPIRICAL INVESTIGATION

Ginette Mcmanus, Jacques Saint-Pierre and John Domonkos

This study is the first to provide empirical evidence on the information effects of the adoption of formal strategic planning. Most of the early empirical studies sought to measure firm performance via accounting ratios as surrogates for planning performance. Using this approach, many studies found a positive relationship between planning and accounting performance, several others found none, while a few muddled through to find a negative association between the two. Borrowing from theories developed in the information economics literature and using previous empirical results on the planning-performance controversy, three hypotheses are empirically investigated in this study. The hypothesis that the adoption of formal strategic planning has information content; that is, that it increases investors' informedness and consensus of beliefs, is first tested using both the increased variability and the rate of return approaches. The hypothesis of a reduction in firm's riskiness following the adoption of formal strategic planning and the hypothesis that the adoption of formal strategic planning takes place in times of economic austerity are then tested. Evidence supporting the information content hypothesis and the view that the adoption of formal strategic planning is in reaction to poor firm performance is provided.