Assessing the economic worth of new product pre‐announcement signals: theory and empirical evidence
| Pages | 75-93 |
| Published date | 01 April 2001 |
| Date | 01 April 2001 |
| DOI | https://doi.org/10.1108/10610420110388645 |
| Author | Debi Prasad Mishra,Harjeet S. Bhabra |
| Subject Matter | Marketing |
Assessing the economic worth of
new product pre-announcement
signals: theory and empirical
evidence
Debi Prasad Mishra
Assistant Professor of Marketing, School of Management, State
University of New York at Binghamton, Binghamton, New York, USA
Harjeet S. Bhabra
Assistant Professor of Finance, Faculty of Commerce and
Administration, Concordia University, Montreal, Quebec, Canada
Keywords Product launch, Product introduction, Competitive strategy,
Product management, Competitive advantage, Stock markets
Abstract Actual and intended new product introduction announcements constitute
significant events for firms' customers, competitors, and investors. Typically, past
research has focused on the economic impact of actual new product introduction
announcements. However, research relating to firms' intentions to introduce new
products is relatively uncommon. These intended introductions or ``pre-announcements''
have important strategic objectives and affect a firm's customers and competitors in
significant ways. Builds upon existing theory to study the economic impact of product pre-
announcement signals. Adopts the event study methodology and explores the relationship
between product pre-announcements and stock prices. Results show that relatively
irreversible product pre-announcements, i.e., those containing ``evidence'' are valued
positively by the stock market. In contrast, the stock market ignores bluffs or easily
reversible announcements that lack such evidence. Given the significance of pre-
announcements, managers should take these signals seriously. Discusses how product
managers may use these results to develop actionable strategies for communicating with
investors. Outlines the contribution of this paper to product management theory.
Introduction
Announcements regarding actual and intended new product introductions are
significant events that are closely scrutinized by a firm's important
stakeholders such as investors, financial analysts, and customers. Typically,
announcements of actual new product introductions contain information that
signals a firm's ability to earn superior economic returns in the future.
Consequently, financial markets may react to these information releases by
directly affecting the announcing firm's security price (Chaney et al., 1991;
Eddy and Saunders, 1980). For exam ple, when Amgen recently announced the
introduction of a new drug to treat rheumatoid arthritis, i ts shares posted huge
gains (Rundle, 1999). Likewise, the stock price of the 3M company is
constantly affected by actual pr oduct announcements since the company's goal
is to earn about 25 percent of its yearly revenues from the introduction of new
products (Kotler and Armstrong, 1991). Similar positive effects of product
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This research was partially funded by a faculty development grant from the School of
Management, State University of New York at Binghamton. The authors
acknowledge the assistance of Anirudh Chauhan and Edward Keller in data
collection. They also thank the editor Michelle Morganosky and three anonymous
reviewers for their constructive comments on earlier versions of the manuscript.
New product introductions
JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 10 NO. 2 2001, pp. 75-93, #MCB UNIVERSITY PRESS, 1061-0421 75
An executive summary for
managers and executive
readers can be found at the
end of this article
announcements on a firm's stock price have been documented for Apple when
it announced its Macintosh line and for Johnson & Johnson wit h respect to
disposable contact lenses (Crawford, 1994). In sum, both the academic and
managerial literatures suggest that new product announcements may affect a
firm's stock price. It is important to note that the stock market may not always
react positively to product announcements. As Chaney et al.(1991,p.584)
note, ``most marketing events are small relative to the total market value of the
firm'' and that ``many significant events may be missed''. However, to the
extent that product pre-announcements contain significant information, these
signals may affect the stock market.
While the existing literature has focused on actual product introduction
announcements, relatively little research attention has been directed at
understanding the economic impact of intended product introductions or
product pre-announcements. In contrast to a product announcement, a pre-
announcement is a ``formal, deliberate communication before a firm actually
undertakes a particular marketing action'' (Eliashberg and Robertson, 1988,
p. 282, emphasis added). Firms may make such pre-announcements a few
weeks to a few months before actual product introduction.
Although a pre-announcement may not always be followed up by actual product
introduction, these events may nevertheless have a strategic bearing on
competitors, customers, shareholders, and distribution channel members. For
example, Boeing pre-announced the 787 aircraft model to pre-empt competition
in the high end passenger aircraft market (Business Week, 1993a). Likewise,
Microsoft has often been accused of pre-announcing products so that competition
is thwarted in its efforts to introduce comparable offerings. As Davidson (1993)
notes, Microsoft would allegedly ``freeze the market by announcing products
well before the release date in a fashion that hinders the ability of competitors to
peddle similar products''. The key idea here is that companies often attempt to
affect the competitive landscape by pre-announcement signals that precede actual
marketplace actions. This phenomenon of competing with products that do not
exist as of a certain date has often been dubbed ``vaporware'' in the trade press
(Bayus et al., 2001; PC Week, 1991).
The apparent widespread practice of pre-announcement leads to an
inevitable conclusion. If companies can successfully pre-announce products
and pre-empt competition, they may also realize higher economic profits.
Consequently, such pre-announcements are likely to be reflected in higher
stock prices for these firms.
The event study method (Brown and Warner, 1985; MacKinlay, 1997) is a tool
which managers can use to investigate the impact of pre-announcements on
stock prices. The basic assumptionin an event study is that capital markets are
efficient (Fama, 1970) and stock prices constantly react to important new
information. As such, an event study cannot investigate whether stock price
reactions are sustainable because every new significant event will affect the
stock price and erase the impact of the earlier event. The importance of an
event study lies in its ability to provide an initial basis for measuring the
performance of marketing decisions that evolve over time. For example, new
product development involves long lead times from conceptualization to
commercialization. Actual new product success may be objectively assessed
only after a product is introduced in the market. Should managers wait that
long to measure performance? By looking at how investors react to a pre-
announcement, managers can form an initial idea about the likelihood of a
product's success much before actual product introduction. Hence, even
though an event study cannot address the issue of sustainable stock prices, it
can nevertheless provide managers with an initial approximate measure of the
performance of a planned product introduction.
``Vaporware''
Event study
76 JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 10 NO. 2 2001
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