New Product Preannouncements and Shareholder Value: Don’t Make Promises You Can’t Keep
April 2007 | Sorescu, Alina
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 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-term (about 13% in one year or up to product introduction). The authors show that preannouncements generate positive short-term abnormal returns only for firms that offer specific information about the preannounced product. The authors 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 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 with the market to extract financial value from new product preannouncements.
- Venkatesh Shankar
- Tarun Kushwaha
Journal of Marketing Research