Does the strategic alignment of value drivers impact earnings persistence?

Purpose - – This paper aims to advance the literature by extending the empirical relation between a firm’s strategy and socially responsible value drivers (customer/employee relations) beyond firm performance to the impact on earnings persistence. Although existing research demonstrates that management’s effective implementation of a specific strategic orientation such as cost focus or product differentiation leads to better financial performance, no studies, to the authors’ knowledge, directly address the effect of strategic orientation on the persistence of earnings. Design/methodology/approach - – This paper utilized the evaluation of a firm’s focus on employee and customer relations through the rating provided by Kinder, Lydenberg and Domini. It uses linear regression analysis to identify statistically significant relations. Findings - – The findings demonstrate that simply focusing on socially responsible employee and customer relations alone does not result in higher earnings persistence. But rather, higher earnings persistence is associated with firms whose strategic orientation is aligned with the firm’s socially responsible value drivers. Additionally, we find that the capital market understands the importance of alignment between a firm’s strategy and its value drivers. Research limitations/implications - – The analysis was based on a large-scale sample, and the authors concede that as a consequence of this decision, the results are based on indirect assessments of the firm’s actions rather than direct feedback from the firm. However, the authors believe the large-scale, external assessment that they use increases the generalizability of the results. Practical implications - – The results provide guidance to management and boards of directors regarding the critical nature of disclosure regarding firm strategy and corporate social responsibility (CSR) as well as inform financial statement users as to useful relations beyond the actual reported accounting numbers. Originality/value - – Existing research has explored the relation between CSR and improved financial performance, but no studies, to our knowledge, examine the relation a firm’s strategy and value drivers (customer/employee relations) has on earnings persistence. Earnings persistence is worthy of study, as it captures the non-transitory nature of earnings, which is a useful attribute for both internal and external users of financial reporting.