Media Endorsements of New Product Announcements: A New Marketing Strategy

Published date01 June 2016
AuthorSarah (Hong) Xiao,Jie (Michael) Guo,Angelos J. Doukas,Herbert Y. T. Lam
Date01 June 2016
Media Endorsements of New Product
Announcements: A New Marketing
Angelos J. Doukas
Deree College, The American College of Greece, DC 709, AP campus 6 Gravias Street,
Aghia Paraskevi, Attica Greece 153 42
Jie (Michael) Guo
Durham Business School, University of Durham, Mill Hill Lane DH1 3LB, UK
Herbert Y. T. Lam
China Financial Policy Research Center, School of Finance, Renmin University of China,
Beijing 100872, China
Sarah (Hong) Xiao
Durham Business School, University of Durham, Mill Hill Lane DH1 3LB, UK
This paper examines whether investorsdecisions are inuenced by the word
content of newspaper reports of new product announcements. Using textual
analysis we nd that announcements of new products covered by nancial
newspapers with positive word content earn signicant 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 rms
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, 394426
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 rms
future prospects, and markets should credit such announcements. Prior studies conrm
this, suggesting that new product announcements have positive wealth effects for
(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
investorsdecisions. Applying textual analysis to news reports on new product
announcements in the nancial press, we nd that the stock market only responds
positively to those announcements containing positive words. When there are no positive
words in the announcement, then no signicant impact on the announcers 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.
However, a plethora of recent research in the eld of behavioural nance has
documented the prominent role of nancial newspapers in market reactions (e.g., Tetlock,
2007; Tetlock et al., 2008 in the USA, Grifnet al., 2011 in international markets). In
particular, this line of research demonstrates that the tone of news has a signicant impact
on stock returns. Furthermore, results indicate that journalistsreporting styles have a
signicant impact on investor behaviour (see Dougal et al., 2012). Overall, this research
demonstrates that investors are not always rational, and hence sentiment does indeed
matter and affects the prevailing market price.
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
ll 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 rst paper to examine
the stock markets reaction to the textual tone of new product announcements.
The announcements of new products not only affect the market value of the respective
rm; studies also demonstrate that such announcements simultaneously have effects on
the rms peers (see Zantout, Zaher and Radha Chaganti, 1996; Chen et al., 2005). Such
results are consistent with the market substitution/business-stealing hypothesis, which
Other studies examine the stock markets reaction to activities prior to a new product launch,
such as R&D activities (Doukas and Switzer, 1992).
See Chaney et al. (1991), Chen et al. (2002, 2005), Chen et al. (2012).
Interested readers are referred to Subrahmanyam (2008) for an excellent review of the
behavioural nance literature.
Previous literature shows that sentiment affects stock prices (Baker and Wurgler, 2006) and
exchange rate uctuations (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 rms, and this, therefore, explains the adverse impact on rival rm 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 benet rival rms with similar products. As a result, we should be able
to observe positive market reactions in rivalsshare 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
eld 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 rms.
Using new product announcements manually collected from nancial newspapers
(namely the Financial Times and The Times)
, 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 rms between 1980 and 2010. We nd that, consistent with previous
studies, rms 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 rst group and announcements that are considered positive-neutral. New
product announcements that do not contain any positive words (POS ¼0) are dened as
positive-neutral announcements. Alternatively, if the content of new product announce-
ments includes positive words, these are dened as positive announcements (POS >0).
We nd that positive announcements are associated with signicant stock price increases.
However, the evidence reveals that positive-neutral announcements have no signicant
impact on the stock price of the announcing rm. This nding 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 denition of announcements with positive word
content, we dene new product announcements without negative content as negative-
neutral announcements (NEG¼0) and those with negative word content as negative
announcements (NEG>0). The ndings of this analysis reveal that thereis no signicant
difference between negative and negative-neutral announcements.However,wend
signicant differences between the two groups when we restrict our sample to the
announcements of new products that are not contaminated by othernews ve 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 rms with new
product announcements experience a signicant return advantage relative to their rival
rms. However, the return advantage is concentrated on positive announcements
(POS >0). In other words, the return advantage of announcing rms over their rival rms
is amplied by the linguistic content of the new product announcement. This evidence
provides additional support for the proposition regarding the market substitution effect
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

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