Paul K. Chaney, Timothy M. Devinney, and Russell S. Winer, 1989, 89-105
The effect of new product announcements on a firm's stock price.
Type of Report
Report of large-scale empirical test of theory.
To demonstrate the usefulness of a technique from financial economics ("event study methodology") in a marketing application. The technique has seen limited use in marketing and strategic planning heretofore. The present report describes a considerable extension.
Describes how event study methodology was used to assess the effect of new product announcements on stock prices. Uses 1,101 announcements made by 231 firms in the empirical analysis. The "event date" was set as the day a new product announcement appeared in the Wall Street Journal, and different-sized "windows" (number of days before to number of days after announcement) were set. Models were estimated for each firm to calculate the cumulative average excess return for each stock, using four different windows.
Marketing strategists, economists, and forecasters.
New product introductions affect the market value of the introducing firms. The average impact of the announcement of a new product is an approximate 0.75 percent increase in the market value of the firm. This increase is concentrated solely in the three days surrounding the announcement of the new product. The effect varies marginally from industry to industry and year to year and is sensitive to the type of product announced.
Some qualifications must be noted. First, the sample of firms includes only those listed on the NYSE and AMEX. Therefore, the role of new products at small firms was not investigated. Second, the increase in market value does not represent the total value of the new product but a convergence of market opinion about the product's value. Third, since the source of new product announcements was the Wall Street Journal, any reporting bias on the part of the Journal will be reflected in the sample. Yet within the context of these qualifications, the general results hold true.
The study points to several key insights:
- Financial markets positively and quickly recognize the value of marketing decisions. This is both a long- and short-term effect. In addition to the 3-day stock return effect, the 14-year price/earnings ratio of introducing firms is twice that of a matched sample of non-introducing firms.
- Financial markets distinguish between types of new products and types of announcements. Original new products are strongly valued by the market (a 0.93 percent boost in the value of the firm) while product updates are mostly ignored. Announcements for multiple products have a larger effect than single product announcements. Multiple product announcements have approximately 1.6 times the effect of a single product announcement.
- Firms that introduce new products differ from the average NYSE or AMEX firm. They are significantly larger than non-introducing firms and are riskier (based upon their stock market risk) than the market as a whole.
- The value of a new product introduction is affected by the level of interest rates. There is a negative relationship between the market value gains attributable to a new product introduction and the level of interest rates.
This study has two important implications. First, it provides a test case on how the event study methodology can be used to analyze the impact of strategic marketing events. In the last decade, this methodology has become something of a staple technique in economics, finance, and accounting, but has seen little use in marketing or strategic management. Although limited in many respects because of the nature of marketing events, the methodology has been shown to provide interesting information about the value of strategic decisions and a ready interface into some of the theoretical implications from finance and economics.
Second, the study provides a mechanism that marketers and strategic management scholars can use to focus more accurately on the true underlying economic value of management decisions; it can be used instead of surrogate measures such as accounting profit or market share. Although the study says nothing specific about market share, it does point to some interesting ideas about the value of accounting information. When the innovating firms in the sample were compared to a matched sample of other NYSE and AMEX firms, it was found that (1) there was no real difference in accounting profitability, and (2) the non-innovating firms had higher R&D-to-asset ratios. The accounting information would have provided little conclusive evidence.
There are certain caveats to the implications of this research. The market value information gathered here must always be examined in light of the accounting and marketing information available. Also, the methodology is limited to examining events which are distinct and recognizable and large relative to the market value of the firm--such as new product introductions. It is useless for studying events which evolve slowly or have little market impact. In spite of these limitations, the technique has considerable potential as a tool for marketing analysis.
Professor Devinney observes:
"The major purpose of this research has been to provide an interface into the research techniques of financial economics and to provide evidence on how market value is affected by marketing decisions. From this somewhat academic beginning, we have also gleaned some information which provides some substantive guides to managers.
"Perhaps the key managerial implication for today's marketplace is that the financial markets do not appear to possess that 'short-term-only' focus that we see discussed in the popular press. Long-term investments, such as new products, are rewarded by the market, and long-term investing firms receive premiums above their accounting earnings for being long-term innovators. Updating a product, which is primarily a short-term strategy, receives barely a sigh from the financial markets.
"It also appears that how and when you introduce new products makes a difference. There appear to be fairly clear business cycle effects on the market value of a new product introduction. High interest rate periods appear to be the worst time to engage in an introduction. When introducing multiple new products, managers should be aware of the fact that multiple product announcements have less than twice the effect of a single product announcement. Therefore, it may pay for a firm to separately announce each of the products over some time period rather than having a multiple product announcement.
"A more critical academic aspect of this work is that it is one of only two studies (Horsky and Swyngedouw  being the other) to address the market valuation of marketing decisions. It is hoped that the findings given here and the exposition of the technique will cause more investigators to take a marketing/economics/finance view of strategic decisions. After all, that is exactly what executives are doing themselves.
"Our future research is aimed at further filling in the gap between new product strategy and the determination of market value. In a follow-up study we are gathering information directly from the introducing firms about their new product strategy, for the firm generally and for the specific products, about the performance of the products studies, and about the performance of competing products. We hope that this research will further the integration of marketing, finance, and economics, and that it will provide a clearer picture of the determinants of successful product innovations."
About the Authors
Paul K. Chaney is Assistant Professor of Management at Vanderbilt University. Timothy M. Devinney is Assistant Professor of Management at Vanderbilt University. Russell S. Winer is Professor of Marketing at the University of California, Berkeley.
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This is Paul’s first book not to be published traditionally in hard copy.
It will appeal to you if you have an interest in market research, you have a market research project to complete and need help with how to go about it, you are studying for a business degree and market research is part of your course or if you are taking the Market Research Society/City & Guilds Certificate in Market & Social Research. Whatever the case, we know that the knowledge shared within this book will help you succeed.
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|1||The Basics Of Market Research (incl. Preface)||mp3|
|4||An Introduction To Research Methodologies||mp3|
|5||Introduction To Qualitative Research||mp3|
|6||Introduction To Quantitative Research||mp3|
|7||Introduction To Sampling||mp3|
|8||An Introduction To Questionnaire Design||mp3|
|9||Turning Data Into Findings||mp3|
|10||Reporting and Communicating Findings||mp3|
|11||Professional Development and the Market Research Industry||mp3|