Interpreting the Stock Returns to New Product Announcements: How the Past Shapes Investors’ Expectations of the Future

Nooshin L. Warren and Alina Sorescu
Article Snapshot
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New Product Announcements and Stock Returns
Key Takeaways

What? Investors do not always respond positively to new product announcements, even when these products are well received by consumers and industry experts.

So What? This does not mean that these products destroy firm value, but rather that investors already had  expectations about their value-added.

Now What? Accounting for pre-event expectations is a critical step to correctly interpret results from short-term event studies.

Article Snapshot​s: Executive Summaries from the Journal of Marketing Research

We show that investors can form expectations about the future innovation output of a firm based on the firm's past actions, which can cause an ex-ante increase in stock prices and a smaller ex-post market reaction when an actual new product is announced.


Research Question
We propose that investors form expectations about firms' future actions based on firms' past actions, and that the role of these expectations on the stock market reaction to new announcements that are part of an ongoing strategy has been overlooked in previous research. We propose a set of firm and industry characteristics that help shape investors’ expectations of a firm’s future inovative activity. We empirically test the effect of investors’ expectations on firm value and on the stock market reaction to firms’ subsequent new product announcements.

Methods
Using a sample of 4,865 new product announcements made by 826 publicly traded US firms obtained from the RavenPack database, we show that the stock market reaction to a new product announcement is negatively related to (1) the number of new products previously announced by the firm, (2) the average number of new products previously announced by the firm’s competitors, and (3) the average sentiment of past public news issued by the firm. These same three factors are also positively related to the market value of the firm (Tobin's q) measured immediately prior to each new announcement.

Findings

We show that firms' prior innovation activity is positively related to the market value of the firm measured immediately prior to a new product announcement while negatively related to announcement-date returns, consistent with the notion that these returns only measure an update from previously-set investor expectations. We also measure the long-term stock performance of firms in relation to their unexpected innovation output and find a positive relationship between performance and output; the opposite of what we find in the case of announcement-day CARs.

Implications

We emphasize the importance of correctly interpreting event-date changes in stock returns in the context of broader corporate strategies where investors could use past information to form expectations about the future. We alert managers of firms that are frequent innovators, firms that perform in innovative industries, and well-performing firms to correctly evaluate the reactions to each new product announcement, keeping in mind that it will be increasingly difficult for their firms to surpass investors' expectations. 

Questions for the Classroom

  • Can new product announcements made by a frequent innovator still elicit positive investor reactions? If not, does it mean that innovation does not contribute to the value of these firms? 
  • Which factors can help investors form expectations about firms' future innovation outcome?
  • How can we interpret the results of event studies when the event belongs to a broader ongoing strategy of the the firm?

Article Citation: Nooshin L. Warren and Alina Sorescu (2017) Interpreting the Stock Returns to New Product Announcements: How the Past Shapes Investors’ Expectations of the Future. Journal of Marketing Research: October 2017, Vol. 54, No. 5, pp. 799-815

doi: http://dx.doi.org/10.1509/jmr.14.0119 


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Nooshin L. Warren and Alina Sorescu
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