New-Product Pre-Announcements Boost Shareholder Value
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For years, businesses, especially those in the high-tech arena, have been announcing new products well in advance of their actual appearance on the market. Researchers at Mays have found solid evidence that such new-product pre-announcements, done right, can have real, positive impact on shareholder value and on a firm's bottom line.
"Our analysis indicates that over the long-term, firms that announce new products in advance may experience a boost in shareholder value of up to 13 percent of their market capitalization," says Venkatesh Shankar, holder of the Coleman Chair in Marketing at Mays. "New-product pre-announcements can accelerate firm value before the product actually debuts. Of course, positive results depend on such announcements providing precise information and on their being updated frequently prior to product introduction, as well as the track record of the firm involved."
Shankar, along with fellow marketing faculty member Alina Sorescu and doctoral student Tarun Kushwaha, analyzed 419 pre-announcements for new hardware and software products that appeared in industry publications from 1984 through 2000. The team collected data on these pre-announcements and tracked subsequent information on them, recording share prices from the time of pre-announcement until the introduction of the new products or for one year, whichever came first.
"Prior to our study, there was no strong empirical evidence about the value of pre-announcements," Shankar says. "One school of thought held that pre-announcements were helpful in alerting customers to new products and inducing them to wait to buy, thus pre-empting competitors. Other evidence suggested, however, that pre-announcements could endanger a company when promises were not fulfilled or product release was delayed, damaging credibility or by alerting competitors."
"In addition to data, theory was lacking to adequately explain new-product pre-announcement effects," Sorescu adds. "Market-efficiency theory predicted that any value from pre-announcements would be realized immediately in the stock market. However, some studies of the impact of company events on shareholder value had indicated that this was not always the case. Our study looked for theoretical explanations for this discrepancy."
The work by Shankar and his team suggested that gains from pre-announcements were manifested only over the long-term — one year or until introduction of the new product. They hypothesized that such long-term effects depended on the need for investors to reduce their uncertainty about probable product performance through acquiring updated information.
"And, of course, investors are rational, so they look closely at a firm's track record with regard to pre-announcements," Shankar says. "So, return from pre-announcements is based on specificity and up-to-dateness of information, as well as on the reliability of a firm's previous performance. It's tricky to evaluate because the effects of pre-announcement are hard to measure; other events during the year besides a particular pre-announcement may impact share price, as well."
The current study statistically controlled for such events, as well as the impact of multiple pre-announcements by the same firm during the same period, using a method called calendar-time portfolio analysis. Study results are forthcoming as a Marketing Science Institute working paper entitled "Do New Product Pre-announcements Increase Shareholder Value? Don't Make Promises You Can't Keep."
"Our work shows that new-product pre-announcements can have value if firms do them correctly," Shankar says. "The best advice is for them to be specific in the information included, to update such announcements frequently and not to make promises they can't keep."
