An examination of the relationships between strategy, *environment, and performance in a fundamental analysis model

Scope and method of study. The purpose of the study is to assess the association between strategy, accounting information, and past firm value in order to develop a valuation model that predicts future firm value. Using the theories of Porter and Miles & Snow, this study develops a model that links firms' strategy choices and accounting information to performance by measuring the strategic fit. Strategists believe firm value is equal to a multiple of book value plus the intrinsic value created by the fit between the environment, managerial decisions, and firms' actions. A fundamental analysis model created by Feltham and Ohlson describes firm value as a multiple of book value plus discounted abnormal earnings. These two theories of firm value are combined to link future earnings to current strategic decisions. Annual data from a group of 225 single industry firms is analyzed in a multiple regression model. F-tests and variable coefficients were used to test three hypotheses.;Findings and conclusions. The results indicate that strategic choice and industry structure affect the information content of accounting measures. All the models were significant at or below the .10 alpha level. The results of this study imply that financial ratios and other financial statement information that have previously been identified as value relevant could be more useful when they are framed within a firm specific context. Specifically, the effect (on future firm value) of increasing (decreasing) certain costs and expenses can change depending on the strategic choices of a firm's management. In addition, the results indicate the alignment of strategy with the environment and with the managers' decisions is more value relevant than strategy alone and more value relevant than accounting measures alone. Finally, the results imply that once a firm has committed to a strategy maintaining the strategy has a positive affect on firm value. For firms with consistent strategies, the models R-squared values improved monotonically as the abnormal earnings measurement periods increased.