How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements

Abstract

We examine the role of strategic interaction in explaining the valuation effect of new product announcements and employ Sundaram, John, and John's (1996) competitive strategy measure to operationalize the nature of a firm's competitive interaction. Using a sample of new product introductions between 1991 and 1995, we find that the market values introductions announced by firms in strategic substitutes competition more favorably than those announced by firms in strategic complements competition. These results hold after we control for other variables that could explain the announcement effect. We also find that industry rivals of those announcing firms that compete in strategic substitutes and experience a positive announcement effect generally suffer a small, but significant wealth loss. The evidence supports the notion that the nature of competitive interaction in an industry is important in assessing the effect of corporate product strategies on shareholder value. Previous studies show that announcements of new product strategies are generally associated with a positive effect on shareholder value (

Raising the returns to venture finance

“…Building on the work of Sundaram et al (1996), Chen et al (2002) provide further support for the effect of announcements on the stock price of disrupted firms. Employing a dataset of 384 new product announcements by firms from 39 industries, they found that where a new product launch announcement was viewed as a strategic substitute for an incumbent product, the incumbent experienced negative and statistically significant reductions in its stock market value within a narrow 2-day window.…”

“…Such price behaviour is justified from theory considerations (Arrow, 1962). This is reinforced by empirical studies which have observed the negative impact upon an incumbent's market value that an announcement of disruptive innovations from rivals (Sundaram et al, 1996), or the actual launch of rival products that are strategic substitutes of the incumbent's products (Chen et al, 2002;Whinston and Collins, 1992).…”

“…Even in semi-efficient capital markets all public announcement that impact on the present and future earnings of a stock is promptly absorbed via changes in the stock price (Fama, 1991). A number of studies have observed that the effects are almost complete within as little as 2 days in the case of stock substitutes (Chen et al, 2002;Sundaram et al, 1996.) And, as noted above, the carrying costs for the put are comparatively less for the sophisticated investor than the naïve one.…”

“…Employing a dataset of 384 new product announcements by firms from 39 industries, they found that where a new product launch announcement was viewed as a strategic substitute for an incumbent product, the incumbent experienced negative and statistically significant reductions in its stock market value within a narrow 2-day window. The announcements studied by Chen et al (2002) were not just disruptive technologies but also non-disruptive ones too, the competitors were defined by a wide industry definition rather than a narrow product-based criterion, and the test of the price fall was restricted to a narrow 2-day window in comparison to a 260-day benchmark which might be more typical of an options contract. The test is therefore much more demanding than that which our investors need.…”

New product development and firm value in mobile handset production

“…al, 19955;Chen et. al., 2002;Sharma and Lacey, 2004;Cho and Pucik, 2005;Connolly and Hirschey, 2005).…”