How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements

Abstract

We examine the role of strategic interaction in explaining the valuation effect of new product announcements and employ Sundaram, John, and John’s (1996) competitive strategy measure to operationalize the nature of a firm’s competitive interaction. Using a sample of new product introductions between 1991 and 1995, we find that the market values introductions announced by firms in strategic substitutes competition more favorably than those announced by firms in strategic complements competition. These results hold after we control for other variables that could explain the announcement effect. We also find that industry rivals of those announcing firms that compete in strategic substitutes and experience a positive announcement effect generally suffer a small, but significant wealth loss. The evidence supports the notion that the nature of competitive interaction in an industry is important in assessing the effect of corporate product strategies on shareholder value. Previous studies show that announcements of new product strategies are generally associated with a positive effect on shareholder value (Woolridge, 1988; Chaney, Devinney, and Winer, 1991; Kelm, Narayanan, and Pinches, 1995; and Chen and Ho, 1997). Chaney et al. (1991) find that the value of a new product announcement is higher for firms in more technologically based industries and for firms that make original- or multiple-product announcements. They find that the value is lower for firms that make frequent product announcements. Chaney et al. (1991) also find that higher short-term interest rates have a negative impact on the value of new product