UNDERSTANDING THE EFFECT OF SEQUENTIAL PRODUCT INFORMATION RELEASE EVENTS ON FIRMS’ STOCK PRICES : AN EMPIRICAL INVESTIGATION OF INFORMATION ASYMMETRY THEORIES

The objective of this paper is to empirically investigate how interdependence of new product development (NPD) communications, i.e., new product introduction announcements preceded by past preannouncements affects firms’ security prices. Past research has focused on communication events independently, e.g., at the front or the back end of the NPD process. In contrast, this study considers the interdependence of signals. The results show that even when firms do not communicate effectively at the initial stage, i.e., by using costless signals, they can create value through subsequent product introduction. Hence, considering signals in conjunction provides a more complete picture of NPD communications. Specifically, new product communications are viewed as sequential information events that affect firms’ stock prices in distinct ways. The study develops a conceptual model that draws upon information asymmetry theories, i.e., signaling and agency theory to hypothesize the effect of firms’ product introduction announcements on security prices given two antecedent preannouncement types (costless and costly signals). Hypotheses are tested by conducting an event study on a sample of 149 matched observations (product introduction preceded by a certain type of preannouncement). Empirical results confirm the expectation that positive stock price effects are observed during product launch that is preceded by initial costless signaling. In contrast, for ex-ante costly signaling situations, launch events are not diagnostic enough to elicit stock price reaction. Since organizations’ NPD communications can revise investors’ prior beliefs, they need to be understood in more detail and managed strategically