Data Analytics Strategy and Internal Information Quality

Abstract

I examine whether a strategic focus on data analytics improves firms’ internal information quality, the decision-usefulness of information. Using textual analysis of firm disclosures to identify a data analytics strategy, I first document that firm, leadership, and operating environment characteristics are all important determinants of the decision to adopt a data analytics strategy. To infer the impact of a data analytics strategy on internal information quality, I examine its implications for various operating and financial reporting outcomes. I find that a data analytics strategy is primarily associated with better operating efficiency. More specifically, when firms employ a data analytics strategy, they invest and utilize existing resources more efficiently. I also find evidence that a data analytics strategy is associated with improvements in management forecasts. Overall, the results are consistent with a data analytics strategy improving firms’ internal information quality.