New Perspectives on Assessing the Stock Market Value of Innovation

Abstract

Innovation is considered an imperative for firm survival and growth. Firms invest considerable amount of time and resources on their innovation activities. Consequently, they are willing to inform their investors of the output of these investments, namely their new product releases, so that investors can correctly adjust the price of firms’ stock accordingly. For decades, researchers have been studying investors’ reaction to firms’ new product announcements. However, several aspects of the manner in which these announcements are evaluated by investors are still unexplained. This dissertation attempts to shed light on two important yet overlooked aspects in estimating the value of innovation.

The first essay investigates how firms’ success at past new product introductions helps investors form high expectations from the firms’ future innovation output, and leads to a smaller investor reaction to subsequent new product announcements by these firms. The second essay shows that concurrently announcing new product releases with other positively valenced corporate news leads to an increase in firms’ visibility in the stock market and subsequently it increase firm’s stock price. This increase is greater for firms that face a higher investors’ expectation or for firms that have a small investor base.

Both essays employ the event study method over large samples of new product announcements and provide hitherto unexplored boundaries for the valuation of new products, as well as helpful insights to managers in terms of when and how to introduce their new products in order to maximize their firms’ investor recognition and stock market value.