Organizational Form and the Economic Impact of Corporate New Product Strategies

Abstract

This paper examines the role of organizational form in explaining the economic impact of corporate new product strategies. I find that the wealth effects associated with the announcements of new product introductions are more favorable for introducing firms with focused activities than for those with diversified activities. The results hold even after controlling for other factors suggested in the literature that could affect the value of new product introductions. The findings in this study suggest that the efficient investment hypothesis dominates the internal capital markets hypothesis in terms of the net economic impact of new product introductions on the introducing firms. Copyright 2007 The Author Journal compilation (c) 2007 Blackwell Publishing Ltd.

New product announcements effect on stock prices in India

“…Table VIII shows the acceptance/rejection of the hypotheses framed in the three industries. The studies conducted by Chaney et al (1991), Kelm et al (1995), Chen and Ho (1997), Jones (2000), Chen et al (2002), Srinivasan et al (2004), Sorescu et al (2007), Chen (2008), Lee and Chen (2009), Sood and Tellis ( 2009), Lin and Chang (2012) and Hu et al (2013) also reveal the significance of firm size, indicating that investors more optimistically evaluate smaller firms as these are more innovative and entrepreneurial and, therefore, are more apt to create breakthrough products (Schumpeter, 1934).…”

“…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).…”

“…More competitive environment will lead to lesser abnormal gains because the consumers have the option of buying competing products from the rival firms. It is estimated that the shareholder value of the announcing firm is inversely related to the industry competition (Zantout and Chaganti, 1996;Chen, 2008;Lin and Chang, 2012). As the relation between industry competition and industry concentration is inverse, it is expected that a positive relation would exist between the shareholder value and the industry concentration, thus meaning that an inverse relation persists between shareholder value and the industry competition.…”

“…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.…”

Inefficient Investment and the Diversification Discount: Evidence from Corporate Asset Purchases

“…Growth opportunities are estimated by a simple measure of Tobin's q : the ratio of the market to book value of the firm's assets, where market value of assets equals book value of assets minus book value of common equity plus market value of common equity. This measure is widely used in previous studies (e.g., Shin and Stulz, 1998; Chang and Chen, 2002; Thomas, 2002; Kim et al, 2005; Bozec and Laurin, 2008; and Chen, 2008;). We employ standard event‐study methods to examine stock price responses to announcements of corporate asset purchases.…”