Any value in that innovation/annual report study?

While I had my doubts about the innovation and annual reports study — my post here, the study summary here — an off-line commenter pointed out some big cracks in the study’s foundation.  My correspondent’s point was straightforward (my summary below, apologies for my mangling and in-artful prose):

Annual reports and stockholder letters are so heavily vetted by lawyers, auditors, etc. that they are insight-free.  The idea that such documents could yield new information is laughable.

Ouch.  I did, however, try to consider how the authors of the study would respond to that criticism:

Ah, but your point actually supports the validity and reliability of our study.  If the such documents are so heavily vetted, then such future-looking statements should be reliable.

OK…does that really answer the criticism?  Because if the statements in the annual report are so likely to happen, do they represent differentiation in innovation or simply a better performing company?  The industry the study used — on-line banking — has a simple strategy: differentiate by creating (or “fast following”) new and better-performing features, functions, and products.  No on-line bank pursues a low-price strategy, e.g., they’re all low-price.  Therefore, any strong performer in this industry would naturally report more innovation and be looking to the future.  

Also, the lede suggests that this info would be useful to stockholders, but the piece says nothing about relative financial, market share, or stock out-performance.  The measures used are essentially industrial measures: speed of detection, deployment, adoption, implementation.  It is hard to believe that such transparent outperformance wouldn’t be fairly obvious already, and therefore quickly arbitraged away or built into the stock price well before any formal financial reports became public.

I would have been more impressed if this study had looked at an industry with a wider spectrum of possible strategies or if it had looked at relative financial or stock performance.  But then, I’m not sure that then the processed cheese product annual reports and junk mail stockholder communications would have yielded such apparent “insights”.

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