New Product Announcements, Innovation Disclosure, and Future Firm Performance

Abstract

Our study extends the literature on product innovation by investigating the managerial disclosure of new product innovation in the context of the tension between managerial incentives and disclosure. To test our empirical predictions, we develop a dictionary-based innovation disclosure measure derived from the narratives in new product announcements (NPAs). We find that: 1) investors positively and significantly respond to the extent of innovation disclosed in NPAs, 2) the degree of innovation disclosed in NPAs predicts future financial performance for up to two years (after controlling for R&D capital and patents), and 3) managerial disclosure incentives affect the level of innovation disclosure and its performance predictability. We further document that the effect of managers’ disclosure incentives is not uniform across different earnings components. Overall, our study contributes to the understanding of managers’ strategic behavior in disclosing new product innovation.

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

JEL Classification: M41, G34, G35