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

Abstract

Investors routinely follow firms’ communications and actions to form expectations about the firms’ future performance. The authors propose a set of firm and industry characteristics that influence the formation of investor expectations in the context of new product announcements. Specifically, they argue that positive expectations of future innovation output should cause an ex-ante increase in stock prices and a smaller ex-post market reaction when an actual new product is announced. Using a sample of 4,865 new product announcements made by 826 publicly traded U.S. firms, the authors show that the stock market reaction to a new product announcement measured in a five-day window around the 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 about the firm. These three factors are also positively related to the market value of the firm measured immediately before each new announcement, controlling for increases in firm value directly attributable to past new product announcements. In contrast to many articles in the marketing literature that imply that the added value of a marketing event can be fully assessed from the stock market reaction to the announcement of the event, the authors clarify that for recurrent events or events that are part of a firm's broader strategy, this reaction reflects only an update of investors’ expectations of future firm performance.