IUP Publications Online
Home About IUP Magazines Journals Books Archives
     
Recommend    |    Subscriber Services    |    Feedback    |     Subscribe Online
 
The IUP Journal of Management Research :
Stock Price Reaction Around New Product Announcements: An Event Study
:
:
:
:
:
:
:
:
:
 
 
 
 
 
 

The paper examines the impact of new product announcements on the stock prices of announcing companies of the BSE 500 index. The paper analyzes a sample of 383 new product announcements for a period of 11 years. The authors have used the reliable CMIE’s Prowess Database to collect the information regarding new product launches, announcements, approvals, unveils, etc. Traditional event study methodology is used in order to measure the abnormal stock market returns. The study found that there is a significant impact of the announcement of new products on the share prices and abnormal returns are generated on the event day. Also, t-test discloses that there is a significant difference between the pre and the post abnormal returns further emphasizing that there is an impact of the event on the abnormal returns. The means of the pre and post period reveals that the returns are positive for the pre period and negative for the post period. This emphasizes the fact that information is leaked to the market prior to the announcement and hence, abnormal returns are generated prior to the event day rather than the post abnormal return period. Therefore, the study concludes that new product announcements hold important information to the Indian stock market during the event and abnormal returns are generated on the event day and also, the returns are generated higher in the pre period than the post period of the event window.

 
 

Innovation means doing things differently, exploring new territories and taking risks. Innovation refers to the economic application of new ideas (Subrahmanya, 2005). Innovation also refers to implementing new ideas to create value. Innovation is not only about inventing or creating new products, but it unlocks the hidden potential in existing ones. Innovation is the creation of better and more effective products, processes, services, technologies or ideas that are readily available to markets, consumers, governments and society. In business and economics, innovation is the catalyst to growth and hence many companies spend all their time making tiny process improvements and creating new ideas and products for the consumers and society. Innovation is, thus, probably one of the most important forces in fueling the growth of new products, sustaining incumbents, creating new markets, transforming industries and promoting the global competitiveness of nations.

Marketing literature has extensively documented the process of new product planning, evaluation, listing and announcing. But despite this long tradition, little research has focused on the role of new product announcements on value creation of firms in the stock market (Chaney et al., 1991). Much of this neglect is rooted in the lack of integration between marketing and finance. This paper attempts to fill this gap by using a traditional event study methodology to study the impact of new product announcements on the market value of a large sample of firms over 11 years period.

Introducing new products is dicey yet crucial to sustain a firm’s competitive advantage and long term well-being. Noting the explosive growth of new products introduced each year, the importance of launching new products can hardly be ignored. However, research estimates that two thirds of all new products fail in two years (Sivadas and Dwyer, 2000). Although the financial implication of new products is critical, little research exists to date as to whether they create value for firms when the new products are announced. Some researchers find that new product announcements are positively associated with shareholder value (Chaney et al., 1991). Other researchers, however, argue that new product announcements do not contribute significantly to the value of firms (Eddy and Saunders, 1980). These contradictory findings suggest that one needs to scrutinize carefully factors to evaluate the impact of new product announcements on shareholder value.

Extant research has examined information embedded in a new product announcement such as whether the announcement provides with information or is just a vaporware, whether the new product itself breaks through the market, and whether the new product succeeds in the market, among others (Chaney et al., 1991; Mishra and Bhabra, 2001; and Sharma and Lacey, 2004).

Over the past 40 years, researchers have spent considerable time and effort trying to understand what decisions drive firm profitability. Reflecting this effort, recent studies have relied extensively on change in stock price, or stock return, as a measure of managerial actions’ total impact on future cash flows, i.e., financial performance (de Mortanges and Rad, 1998; Hozier and Schatzberg, 2000;

de Mortanges and van Riel, 2003; and Conchar et al., 2005). One advantage of stock price is that it is reported on a continual basis. Changes are reported instantaneously, and reactions to specific events can be evaluated immediately. The use of change in stock price draws justification from the Efficient Market Hypothesis (EMH) that posits that the stock market impounds all available information into stock prices and, as such, provides an unbiased estimate of changes in future cash flows (Fama, 1965).

 
 

Management Research Journal, Stock Price, New Product Announcements,new product launches,approvals, unveils.