New product announcements effect on stock prices in India
| Pages | 368-386 |
| Published date | 12 December 2017 |
| Date | 12 December 2017 |
| DOI | https://doi.org/10.1108/JABS-08-2015-0145 |
| Author | Bikram Jit Singh Mann,Sonia Babbar |
| Subject Matter | Strategy,International business |
New product announcements effect
on stock prices in India
Bikram Jit Singh Mann and Sonia Babbar
Bikram Jit Singh Mann
and Sonia Babbar are
both based at the
University Business
School, Guru Nanak Dev
University, Amritsar,
India.
Abstract
Purpose –The purpose of this study is to study the impact of new product announcements on the
shareholder value in India since; there is lack of perceptive results regarding the impact. Also, an
attempt has been made to analyse the determinants of value creation, by industry type, which has so far
escaped the attention of researchers.
Design/methodology/approach –First, standard event study methodology has been used to
measure the abnormal gains/losses of the announcing firms for the new product introductions. Second,
regression analysis has been conducted to find out the relationship between the shareholder value and
the firm and industry characteristic variables.
Findings –The results of the study show that the announcing companies in India have got significant
positive returns during the announcement of the new product. The value stands at 0.00455 for the event
day. In the second part, the application of the regression test has found that firm size, R&D intensity, free
cash flow, debt ratio and market size are significant variables in the determination of the shareholder
value.
Originality/value –The present study goes a step further in establishing the reasons for value creation
when new product announcements are made by the Indian firms. The analysis has been carried out
industry wise to identify the determinants of shareholder value in different industries. This would guide
the decision makers at the strategic level and players of the stock market at large in taking much more
informed decisions.
Keywords India, Event study, Firm characteristics, Industry-wise effect, New product announcements
Paper type Research paper
1. Introduction
In today’s competitive environment, new product innovation is an important key to a firm’s
survival, growth and long-run performance (Akhigbe, 2002). Hauschildt and Salomo (2007)
identify two common themes in various definitions of product innovation, first, entirely new
product or service and, second, the ones that are markedly different from the preceding
product or service introduced. They also argue that an invention is not an innovation unless
it is commercially exploited. In the same context, Rogers (1998) also states that the new
product or service resulting from innovation has to generate extra benefit to the institution
in some way.
New product strategies are vital strategic business investment decisions, and are essential
to guarantee the long-term existence of a business firm. New product introductions create
opportunities for differentiation and competitive advantage, which can have a positive
effect on the announcing firms’ earnings and market values (Chen, 2008). Also, by
introducing new products from time to time, the companies are aided in stimulating
demand, thereby accelerating the company’s sales and profits when the product hits the
market. So, new product introduction is likely to create value for the organization in the
future; therefore, the stock market would probably react positively on such announcements.
Received 30 August 2015
Revised 25 January 2016
12 April 2016
Accepted 4 May 2016
PAGE 368 JOURNAL OF ASIA BUSINESS STUDIES VOL. 11 NO. 4, 2017, pp. 368-386, © Emerald Publishing Limited, ISSN 1558-7894 DOI 10.1108/JABS-08-2015-0145
However, shareholders do not always react positively to new product announcements.
Sometimes, a new product announcement may lead to a decrease in the shareholder
value. It may be because new product announcements may provide cues to the
competitors, and they may come up with more reactive strategies. Also, the competitors
may rush to action and come up with the adoption and diffusion of superior new products
in the market for the consumers. Further on, prior to actual announcement, expectations of
the company about the product may be enhanced. However, when the new product is
actually announced, consumers may find that it is not as good as expected, thereby
leading to a decrease in the value of the company. So, the companies announcing the
products must be very careful in making the announcements because it may lead to a
negative value for the shareholders of the announcing companies. Therefore, it can be
stated that new product introductions might not always be followed by positive stock
market reaction and may be pursued by negative shareholder value.
1.1 Need for the study
Although the financial implication of new products is critical, research related to whether
the new product announcements create value for the announcing firms is inconclusive.
Empirical evidence on the stock market reaction to announcements of new product
introductions indicates a mixed response. One set of researchers finds that new product
announcements do not contribute significantly to the value of firms (Eddy and Saunders,
1980;Wittink et al., 1982;Koku et al., 1997;Koku, 1998;Markovitch and Steckel, 2012).
Another set of researchers, however, argue that new product announcements are positively
associated with shareholder value (Woolridge and Snow, 1990;Chaney et al., 1991;
Chaney and Devinney, 1992;Zantout and Chaganti, 1996;Chen and Ho, 1997;Akhigbe,
2002;Chen, 2008;Lee and Chen, 2009;Sood and Tellis, 2009;Koku, 2009;Lin and Chang,
2012;Hu et al., 2013). Further, the third set of researchers is of the opinion that the new
product announcements are negatively associated with the shareholder value (Pardue
et al., 2000). Appendix 1 briefly illustrates a summary of the literature studies illustrating the
sample period, number of announcements, type of industry and the findings from the
research work. A glance at Appendix 1 also shows that there is no conclusive evidence in
the existing literature regarding the impact of new product announcements on the share
prices. Also, it is noted that studies conducted in the past have tried to assess the impact
of firm characteristics on the cumulative average abnormal return (CAAR) value (Chaney
and Devinney, 1992;Lee and Chen, 2009;Lin and Chang, 2012).
Analyzing the previous studies conducted by the researchers, we may find various
limitations in these studies. The limitation of the study by Eddy and Saunders (1980) was
the use of monthly stock returns instead of daily stock returns. Monthly stock returns do not
precisely capture the impact of new product announcements as the event windows are
very large and mask the true effects of new products announced. Wittink et al. (1982) did
not examine the actual information released or the process in which information was
released. Moreover, the study was limited to only two-year period analysis and restricted to
computer and office machine companies. Chaney et al. (1991) did not distinguish between
announcements and preannouncements, and might have suffered from data aggregation
bias. Koku et al. (1997) emphasized the distinction between announcements and
preannouncements and classified the sample into 25 industries which is a way too large
number to analyze and conclude. Sood and Tellis (2009) may be affected by a potential
selection bias as firms can be more selective about the type of announcements made
during initiation and development than during the market stage. Koku (1998) laid the
emphasis on just one industry that is food and food related, and therefore the scope of
analysis is very restricted to only one industry. Popma et al. (2006) have used the new
product announcements from only one industry. Also, the sample consisted of only 64 new
product announcements which is relatively a small sample for the analysis. Further, the
authors analyzed only those new product announcements which were published directly on
VOL. 11 NO. 4 2017 JOURNAL OF ASIA BUSINESS STUDIES PAGE 369
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