Media Endorsements of New Product Announcements: A New Marketing Strategy

• Published date: 01 June 2016
• DOI: http://doi.org/10.1111/eufm.12057
• Date: 01 June 2016

Media Endorsements of New Product

Announcements: A New Marketing

Strategy

Angelos J. Doukas

Deree College, The American College of Greece, DC 709, AP campus 6 Gravias Street,

Aghia Paraskevi, Attica Greece 153 42

E-mail: ADoukas@acg.edu

Jie (Michael) Guo

Durham Business School, University of Durham, Mill Hill Lane DH1 3LB, UK

E-mail: jie.guo@durham.ac.uk

Herbert Y. T. Lam

China Financial Policy Research Center, School of Finance, Renmin University of China,

Beijing 100872, China

E-mail: herbert.lam@ruc.edu.cn

Sarah (Hong) Xiao

Durham Business School, University of Durham, Mill Hill Lane DH1 3LB, UK

E-mail: hong.xiao@durham.ac.uk

Abstract

This paper examines whether investors’decisions are influenced by the word

content of newspaper reports of new product announcements. Using textual

analysis we find that announcements of new products covered by financial

newspapers with positive word content earn significant abnormal returns. These

returns are 270 basis points higher than new products without positive word

coverage, and such announcements bring negative impact to their rival firms’

value. Our results suggest that the market reacts to the linguistic content of the new

product announcement rather than to the announcement itself.

Keywords: product launch, event study, media sentiment, textual analysis, industry rivals

JEL classification: G10, G12, G14

Comments received throughout the formulation of this work are gratefully acknowledged.

Special thanks to anonymous referees and John Doukas for valuable comments and

suggestions throughout this work.

European Financial Management, Vol. 22, No. 3, 2016, 394–426

doi: 10.1111/eufm.12057

© 2014 John Wiley & Sons Ltd

1. Introduction

Innovation is costly and risky but could prove highly rewarding. Firms often need to

decide how much they should invest in innovation. As new products are expected to

increase revenues, such announcements should convey positive information on the firm’s

future prospects, and markets should credit such announcements. Prior studies confirm

this, suggesting that new product announcements have positive wealth effects for

announcers

1

(see Chaney et al., 1991; Chaney and Devinney, 1992; Koku et al., 1997;

Bayus et al., 2003; Sood and Tellis, 2009) and negative effects on their rivals (Zantout and

Chaganti, 1996; Chen et al., 2005). However, we suggest that not every new product

announcement creates shareholder value in this manner. The rationale behind this

argument is that the wording of an announcement is likely to have a differential bearing on

investors’decisions. Applying textual analysis to news reports on new product

announcements in the financial press, we find that the stock market only responds

positively to those announcements containing positive words. When there are no positive

words in the announcement, then no significant impact on the announcer’s stock price is

observed. The results sharply contradict prior work regarding the positive wealth effects

accruing to announcers from new product launches. More important, the evidence

suggests that the linguistic content of media endorsements is important in determining the

success of announcements of new products.

Previous studies collect the dates of announcements without considering how the news

is reported.

2

However, a plethora of recent research in the field of behavioural finance has

documented the prominent role of financial newspapers in market reactions (e.g., Tetlock,

2007; Tetlock et al., 2008 in the USA, Griffinet al., 2011 in international markets). In

particular, this line of research demonstrates that the tone of news has a significant impact

on stock returns. Furthermore, results indicate that journalists’reporting styles have a

significant impact on investor behaviour (see Dougal et al., 2012). Overall, this research

3

demonstrates that investors are not always rational, and hence sentiment does indeed

matter and affects the prevailing market price.

4

As a result, previous studies that consider

the announcement dates of new products without examining both the content and tone of

the announcement itself might mistakenly conclude that the positive effect of new product

announcements is driven by the event, rather than being due to the linguistic content. To

fill this gap, this paper examines how the market reacts to the informational content of new

product announcements. To the best of our knowledge, this is the first paper to examine

the stock market’s reaction to the textual tone of new product announcements.

The announcements of new products not only affect the market value of the respective

firm; studies also demonstrate that such announcements simultaneously have effects on

the firm’s peers (see Zantout, Zaher and Radha Chaganti, 1996; Chen et al., 2005). Such

results are consistent with the market substitution/business-stealing hypothesis, which

1

Other studies examine the stock market’s reaction to activities prior to a new product launch,

such as R&D activities (Doukas and Switzer, 1992).

2

See Chaney et al. (1991), Chen et al. (2002, 2005), Chen et al. (2012).

3

Interested readers are referred to Subrahmanyam (2008) for an excellent review of the

behavioural finance literature.

4

Previous literature shows that sentiment affects stock prices (Baker and Wurgler, 2006) and

exchange rate fluctuations (Heiden et al., 2013).

© 2014 John Wiley & Sons Ltd

Media Endorsements of New Product Announcements 395

maintains that new products substitute for existing alternatives in the marketplace offered

by rival firms, and this, therefore, explains the adverse impact on rival firm stock prices.

Alternatively, a competing hypothesis concerning the effect of new product introductions

on rivals –the market expansion effect –suggests that new products could expand the size

of the market and benefit rival firms with similar products. As a result, we should be able

to observe positive market reactions in rivals’share prices (see Mahajan et al., 1993). As

the existing literature has yet to be able to provide coherent evidence to support either the

market substitution or market expansion effect, this paper attempts to contribute to this

field by examining the competing hypotheses using new product announcements in the

UK. In addition, we attempt to examine how the linguistic content of new product

announcements affects the spillover effect on rival firms.

Using new product announcements manually collected from financial newspapers

(namely the Financial Times and The Times)

5

, we are able to identify the date and content

of the announcements. Our sample consists of 270 new product announcements made by

all FTSE All Share firms between 1980 and 2010. We find that, consistent with previous

studies, firms with new product announcements in the press earn an average excess return

of 1.1% over a three-day period centred on the announcement day. To assess the impact of

the linguistic content of these announcements in this return generation, we divide the

original sample into two sub-samples –namely announcements that contain positive

words in the first group and announcements that are considered positive-neutral. New

product announcements that do not contain any positive words (POS ¼0) are defined as

positive-neutral announcements. Alternatively, if the content of new product announce-

ments includes positive words, these are defined as positive announcements (POS >0).

We find that positive announcements are associated with significant stock price increases.

However, the evidence reveals that positive-neutral announcements have no significant

impact on the stock price of the announcing firm. This finding indicates that not every new

product announcement leads to a positive market reaction. This result in itself contradicts

the previous literature.

Using the same method as for the definition of announcements with positive word

content, we define new product announcements without negative content as negative-

neutral announcements (NEG¼0) and those with negative word content as negative

announcements (NEG>0). The findings of this analysis reveal that thereis no significant

difference between negative and negative-neutral announcements.However,wefind

significant differences between the two groups when we restrict our sample to the

announcements of new products that are not contaminated by othernews five days before

and after the date of a new product announcement. As a result, both positive announce-

ments and negative-neutral announcements have positive wealth effects for announcers.

Additionally, consistent with prior studies, the results indicate that firms with new

product announcements experience a significant return advantage relative to their rival

firms. However, the return advantage is concentrated on positive announcements

(POS >0). In other words, the return advantage of announcing firms over their rival firms

is amplified by the linguistic content of the new product announcement. This evidence

provides additional support for the proposition regarding the market substitution effect

5

While these announcements might not represent a complete list of new products introduced

in the UK, such a sample is considered representative of announcements that are more likely to

have wealth effects for announcers.

© 2014 John Wiley & Sons Ltd

396 Angelos J. Doukas, Jie (Michael) Guo, Herbert Y. T. Lam and Sarah (Hong) Xiao