New Product Announcements, Innovation Disclosure, and Future Firm Performance

Abstract

This study examines the relation between voluntary, non-financial disclosures of new product innovation and future firm performance. Measuring innovation based on the narratives in new product announcements (NPAs), we find that the level of innovation disclosed in NPAs predicts future financial performance for up to two years (after controlling for R&D capital and patents). Furthermore, we find that under capital markets pressures to deliver growth, managers provide a more comprehensive disclosure of new product innovation that maps into higher future sales. However, managerial incentives affect how the disclosure of new product innovation predicts future earnings as the higher innovation is associated with higher future costs. Our results suggest that capital markets pressures drive managers to conduct a form of “real innovation management” by delivering high innovation and sales but incurring higher costs. Myopic managers do so since costs are not disclosed in NPAs and are incurred in the future, while they may reap the benefits of an immediate positive market reaction at new product announcement. Overall, our study contributes to the understanding of managers’ disclosure of new product innovation.

Keywords: new product announcements, innovation, corporate disclosure, managerial incentives, earnings performance, qualitative disclosure, narrative disclosure

JEL Classification: M41, G34, G35