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  • Slide 1
  • How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals Presenters:918101 918109 918109 918110 918110 918113 918113 918118 918118
  • Slide 2
  • How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements Presenters: 918110 918113
  • Slide 3
  • Introduction: Previous studies show that announcements of new product strategies are generally associated with a positive effect on shareholder value. Chaney et.al(1991),Kelm et.al(1995) Chen and Ho (1997) But these papers don t consider the impact of competitive interaction in an industry. This paper examine whether strategic interaction can also explain the wealth effects of new product announcement.
  • Slide 4
  • Introduction: In this paper, authors examine the role of competitive strategy measure (CSM) in explain the wealth effects of specific product announcements, instead of general increase or decrease in R&D spending, and provide further evidence on the impact of strategic interaction on the outcomes of corporate investment decision.
  • Slide 5
  • Introduction: The sample size is much larger, and we cover a broader set of industries.The sample comprise 384 new product announcements by 101 firms in 39 industries. We examine a more comprehensive set of control variable than has been used in previous studies. Ex: patents.
  • Slide 6
  • The determinates of the wealth Effect of New Product Introductions The specification of the complete relation that we test in this study is as follows: Announcement-period Abnormal Return = 0 + 1 CSM + 2 Tobins q + 3 Free Cash Flow + 4 Debt Ration + 5 Firm Size + 6 R&D Intensity + 7 High-Technology Industry + 8 Patent + 9 Multiple-Product Announcement + 10 Announcement Frequency + 11 Interest Rate + error term
  • Slide 7
  • The determinates of the wealth Effect of New Product Introductions A.Strategic Competition When a firm announces new product, it signals to the market that it creates more opportunities for differentiation and competitive advantage, hence, increases its long-term stream of earning and market share. Positive impact on the announcing firm s share price. But, the actual impact on the firm that introduces the new product depend on how its rival firms respond to the introduction.
  • Slide 8
  • The determinates of the wealth Effect of New Product Introductions A.Strategic Competition Competition in strategic substitutes(SS): If the rival accommodate the announcer by staying put, then the announcer's profit and market share will increase and those of its rivals will suffer a reduction.
  • Slide 9
  • The determinates of the wealth Effect of New Product Introductions A. Strategic Competition Competition in strategic complements(SC): By imitating the innovators actions, the rival can enjoy the free-rider effects by sharing in the profit or reduce the competitive advantage granted to the innovator, or both. If this happens, then the profit and share-price effects on the product innovator could be ambiguous and might even be negative.
  • Slide 10
  • The determinates of the wealth Effect of New Product Introductions competitive strategy measure (CSM) Sundaram et al s(1996) CSM operationalize the nature of a firm s competitive reaction. The CSM estimates the responsiveness of a firm s marginal profit to changes in its competitors revenues. The CSM is the correlation coefficient between DP A /DS A and DS R. If CSM0 then competition is in SC
  • Slide 11
  • The determinates of the wealth Effect of New Product Introductions B. Investment Opportunities Expected Sign + ReasonInvestment opportunities hypothesis(Chen and Ho 1997): New product introductions by firms with good investment opportunities are generally regarded as worthwhile.
  • Slide 12
  • The determinates of the wealth Effect of New Product Introductions C. Free Cash Flow Expected Sign +/- Reason The free cash flow theory: The potential agency cost of new product investment can be higher for firms with high free cash flow. New product investments by low-free-cash-flow firms increase the chance that the firm will seek new external financing. New external financing provides monitoring, and firm s willingness to undergo such monitoring can be a favorable signal. The pecking order theory: Support that firms should use internal financing.
  • Slide 13
  • The determinates of the wealth Effect of New Product Introductions D. Debt Ratio: Expected Sign + ReasonFirms with more free cash flow choose higher levels of debt in their capital structure as a credible pre-commitment to pay out the excess cash flow, thus lowering the expected cost of free cash flow.
  • Slide 14
  • The determinates of the wealth Effect of New Product Introductions E. Firm Size: Expected Sign - ReasonLarge firms new product introductions might have less unanticipated information than those of small firms as information and dissemination is a positive function of firm size.
  • Slide 15
  • The determinates of the wealth Effect of New Product Introductions F. Technological Opportunities: Expected Sign +/- ReasonThe value of an innovation should be higher for firms in more technologically based industries. Investors expect new product announcements by firms in R&D- intensive industries and by firm with high R&D intensive relative to their industries rivals.
  • Slide 16
  • The determinates of the wealth Effect of New Product Introductions G. Patent Expected Sign + ReasonNew products backed by patents should be more valued to the product announcing firm, since competitors would be less able to come up with a matching response.
  • Slide 17
  • The determinates of the wealth Effect of New Product Introductions H. Single- or Multiple-product Announcements Expected Sign + ReasonFirms introducing more products are likely to have more R&D expenditures, patented inventions and skilled labor.They likely to be more competitive in the product market and seize more market share.
  • Slide 18
  • The determinates of the wealth Effect of New Product Introductions I. Announcement Frequency Expected Sign - ReasonIf a firm has a history of making frequent product announcements, then the information value of a new product announcement is likely to be low.
  • Slide 19
  • The determinates of the wealth Effect of New Product Introductions J. Interest Rate Expected Sign - ReasonRising interest rate can imply a decline in product demand, thereby leading to a reduced cash stream of earnings from the product innovation.
  • Slide 20
  • Sample and Descriptive Statistics A. Sample Design A sample of initial announcements of new product by firms listed on either the NYSE or AMEX from Dow Jones News Retrieval Service(DJNES). The DJNES database provides news-article and selected stories from The wall Street Journal, Dow Jones News Wire,and Barron s. Sample period:Jan 1991- Dec1995 We include both new products and product updates.
  • Slide 21
  • Sample and Descriptive Statistics A. Sample Design The new product announcements have to meet the following criteria: 1)The announcing firm should not have other announcements 5 days before and after the initial announcement day. 2)Daily stock return information must be available from CRSP 3)Companies s financial information must be available from the Compustat files The final sample comprises 384 announcement by101 companies.
  • Slide 22
  • Sample and Descriptive Statistics B. Measuring Abnormal Stock Return Standard event-study methods are employed to examine stock price response to announcements of new product. The abnormal return is calculated by the market model. We use the two-day(-1,0) announcement- period abnormal return as the dependence variable in the cross-section analysis.
  • Slide 23
  • Operationalizing a Firm s Competitive Strategy Competitive Strategy Measure(CSM): To operationalize the nature of a firm s competitive interaction. The CSM is the correlation coefficient between DP A /DS A and DS R. DP A /DS A : announcing firm s marginal profit to the ratio of change in its net income (DP A )to change in its own net sales(DS A ) DS R : the change in the rivals net sales.
  • Slide 24
  • Operationalizing a Firm s Competitive Strategy 1) CSM 0 : the competition is in strategic complement(SC) 3) CSM =0 : the competition is in neither SS nor SC
  • Slide 25
  • Control Variable Investment Opportunities (Q) Tobin s q = the ration of the market to book value of the firm s assets. Free Cash Flow (FCF) FCF= (operating income before depreciation interest expense- taxes- preferred and common dividends)/book value of TA Debt Ratio (DEBT RATIO) Debt Ratio= the book value of total debt/ the book value of total equity for the fiscal year prior to the announcement.
  • Slide 26
  • Control Variable Firm Size (SIZE) Firm Size: the logarithm of book value of total asset R&D intensity (RDI)The intensity of the firm s R&D effort/its industry s for the fiscal year prior to the announcement. Dummy variable (HILO) Dummy=1,the announcing firm is in a high-technology industry Dummy=0, otherwise A firm s stock of patents (patent) PS t =0.85PS t-1 +P t PS t : the patent stock in year t P t :th