New Product Preannouncements and Shareholder Value: Don't Make Promises you Can't Keep

Abstract

New product preannouncements are strategic signals that firms direct at their customers, competitors, channel members, and investors. They have been touted as effective means of deterring competitor entry, informing potential customers, and even tipping the balance of technological standard battles in favor of the preannouncing firms. However, preannouncements also carry the risks of unwanted competitive reaction and the negative consequences of undelivered promises. From a shareholder value standpoint, do the benefits outweigh the risks of preannouncing? To address this question, the authors build on agency and signaling theories to develop hypotheses about the effects of preannouncements on shareholder value, and they empirically test these hypotheses on a sample of software and hardware new product preannouncements. The findings indicate that the financial returns from preannouncements are significantly positive in the long run. The authors show that preannouncements generate positive short-term abnormal returns only for firms that offer specific information about the preannounced product. They also show that firms earn positive long-term abnormal returns after a preannouncement if they continue to update the market on the progress of the new product. Both the short-term and the long-term returns are further magnified if the reliability of the preannouncement (i.e., the credibility of the preannouncing firm) is high. The findings offer executives of preannouncing firms clear guidelines on how to manage communications in the market to extract financial value from new product preannouncements.

Marketing Alliances, Firm Networks, and Firm Value Creation

“…We estimated the long-term effect using buy-and-hold return, Ibbotson returns across time and securities, and calendar-time portfolio models as outlined by Sorescu, Shankar, and Kushwaha (2007) and Markovitch and Golder (2008). The results indicate no effect on long-term abnormal returns, which may be due to several reasons.…”

A Diffusion Model for Preannounced Products

“…The level of the parameters of the commitment process post launch (i.e., p 2 and q 2 ) might be affected by the way the product has been announced as well as by the announcement timing. If the consumers feel they are disappointed with the product when it is actually introduced, or if they have been waiting for it too long, the innovation and imitation parameters might be smaller than if the announcement has been dealt with success [9,27].…”

“…As product life cycles get shorter, rapid market penetration has become a major strategic advantage necessary to increase the profitability of new products [6][7][8][9]. Consequently, firms try to design strategies that enhance the likelihood of success by accelerating the diffusion process.…”

“…Robertson [7] argues that they can accelerate the takeoff of a new product and reduce market penetration cycle times, that is, the amount of time it takes to reach maximum sales potential for the product. While investigating on the potential drawbacks of preannouncement strategy in terms of loss in brand trust when consumers face delays [27] or in terms of unwanted competitors' reactions [9,22], recent research identified that this strategy offers main advantages for investors [19] and might positively influence shareholders value [9].…”

Practice Prize Paper—BRAN*EQT: A Multicategory Brand Equity Model and Its Application at Allstate

“…Consistent with prior event studies in finance (Fama and French 1993) and in marketing (Gupta and Zeithaml 2006, Kalaignanam et al 2007, Sorescu et al 2007), we use abnormal returns as a measure of stock market performance. Following Fama and French (1993), we compute the monthly abnormal returns for the company owning the brand using the following three-factor model 13…”