Prophecy or Myopia: Can Stock Market Returns Predict New Product Performance?

M. Berk Talay, M. Billur Akdeniz, and Ahmet H. Kirca
AMA Scholarly Insights
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Key Takeaways

What?  Short-term investor reactions to new product preannouncements are generally elusive indicators of future performance. However, under certain conditions, they can actually be a reliable and useful managerial tool.

So What? We identify five conditions that provide investors with important additional information and help companies more correctly forecast the true value of a new product at the time of its preannouncement.

Now What? Because marketing strategy and budget allocations hang in the balance, managers must understand the constellation of product, brand, and environmental factors that affect early stock market reactions. Otherwise, they risk the perils of myopic and misinformed marketing.

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Marketing executives and researchers have long sought to understand marketing’s critical role in a firm’s success and to measure the financial returns on marketing investments. For example, researchers have demonstrated that various marketing actions such as new product introductions, advertising expenditures, and channel expansions can all improve firm value. Value, in this sense, is usually based on a firm’s current cash flows and the growth of and risks associated with future cash flows. However, this approach assumes that investors can im​​​​​​​​​mediately and accurately assess the expected amount and variation of future cash flows associated with a marketing action. And these assumptions, in turn, carry significant implications for marketers’ next moves in terms of marketing strategy and budget allocations.

In our article “When Do Stock Market Returns to New Product Preannouncements Predict Product Performance? Empirical Evidence from the U.S. Automotive Industry,” forthcoming in the Journal of the Academy of Marketing Science, we explore the conditions under which short-term stock market reactions to new product preannouncements do provide accurate feedback about future performance of new products.

Do Stock Market Reactions to New Product Preannouncements Predict Product Performance?

The answer is no. In fact, we caution managers against using initial stock market reactions as a yardstick for postlaunch product performance.  For instance, when launched in 2003, the stock market reaction to Chevrolet’s SS​R, a retractable hardtop convertible pickup truck with a retro style, was positive. However, sales never gained traction, and the model was discontinued after only three years on the market. On the other hand, Ridgeline, Honda’s only pickup truck in the U.S. market, received a negative stock market reaction, mainly due to its unique unibody design. However, Honda Ridgeline has survived in one of the most competitive segments in the market since its launch in 2005.

As an example from a different industry, Apple’s stock dipped by 6.7% in the three days after its preannouncement of the first-generation iPad. Nevertheless, the fact that the stock market did not react with instant enthusiasm would hardly go on to predict the future performance of the iPad.

Therefore, we caution managers against simply using initial stock market reactions as a yardstick for postlaunch product performance since the link between preannouncements and stock market returns has many contingencies​


Figure: Comparison of Market Shares of Models with Positive and Negative
Cumulative Abnormal Returns (CARs) 
 Notes: This graph shows that market shares of models with positive stock market reactions were not distinguishable from those with negative stock market reactions.​​


So When Are Stock Market Reactions to New Product Preannouncement a Bellwether for Product Success?

We discover that short-term stock market reactions to new product preannouncements can actually be a reliable and useful forecasting tool for future performance, managerial decision making, and related budget allocation purposes, only when the following conditions apply:

  1. ​Preannouncements provide detailed and truthful information about the new product at the time of a preannouncement. It is important to be specific and not to misrepresent or overpromise prior to launch.

  2. Managers complement the new product preannouncements with advertising and communicate relevant information about their brands.

  3. Preannouncements reflect incremental innovations with lower uncertainty.

  4. Brands have high reputation in the marketplace.

  5. Products are in less competitive product segments. 

​These five conditions provide investors with additional information that they can use to understand the true value of the new product at the time of its preannouncement. In particular, specificity and incremental product innovativeness (items 1 and 3) are critical characteristics that increase the credibility of the preannouncement signal. They communicate irreversible information and put restraints on a firm’s actions that would make it costly for the firm to fail on its promises. For instance, Honda provided relatively more information about the Pilot model, its first foray into the highly competitive midsize SUV segment. The reaction of the stock market was highly positive, indicating an expectation of success in the market, which turned out to be prescient: The Honda​ Pilot​​ is one of the most popular models in its segment.

Our findings send an important message to managers: New product preannouncement signals do not operate in a vacuum. The extent to which they provide valuable information to investors depends on other marketing signals, such as reputation and advertising. In addition to product- and brand-related factors, environmental characteristics such as segment competitiveness affect the way investors react to a new product preannouncement. For example, a high level of competitive intensity and information clutter in crowded segments (e.g., midsize sedans) can dilute the information provided in a preannouncement and hamper investors’ ability to assess the true value of a new product introduction.

In a mature yet dynamic industry such as the automotive industry—with 27 different segments in which more than 300 new car models exists —the new product preannouncement is an important signal as well as a critical marketing action toward commercializing a vehicle. Managers cannot afford to view short-term investor reactions to these preannouncements in isolation. Because future marketing budgets, actions, and success hang in the balance, managers must understand the constellation of factors that affect these early stock market reactions. Otherwise, they risk the perils of myopic and misinformed marketing.


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Article Citation

Talay, M. Berk, Billur Akdeniz, and Ahmet H. Kirca (2016), "When Do the Stock Market Returns to New Product Preannouncements Predict Product Performance? Empirical Evidence from the U.S. Automotive Industry," Journal of the Academy of Marketing Science, forthcoming, doi:10.1007/s11747-016-0507-4

M. Berk Talay is Associate Professor, Department of Marketing, Entrepreneurship, and Innovation, Manning School of Business, University of Massachusetts Lowell.

M. Billur Akdeniz is Associate Professor, Department of Marketing, Peter T. Paul College of Business and Economics, University of New Hampshire.

Ahmet H. Kirca is Associate Professor, Department of Marketing, The Eli Broad School of Business, Michigan State University.


Author Bio:

 
M. Berk Talay, M. Billur Akdeniz, and Ahmet H. Kirca
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