New Product Announcements, Innovation Disclosure, and Future Firm Performance

58 Pages Posted: 23 Mar 2020 Last revised: 18 May 2021

See all articles by Jenny Chu

Jenny Chu

University of Cambridge - Judge Business School

Yuan He

The University of Hong Kong - Faculty of Business and Economics

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business

Date Written: May 18, 2021

Abstract

This study examines the relation between the degree of innovation disclosed in new product announcements (NPAs) and future firm performance. Using a new text-based measure of the amount of innovation disclosed in NPAs, we find that higher innovation disclosure predicts favorable future sales and earnings for up to two years (after controlling for R&D capital and patents) but has little effect on costs. We also document a positive relation between market reaction at NPAs and the degree of innovation disclosure. Next, we examine the effect of capital market pressures on innovation disclosure. We find that managers subjected to capital market pressures disclose a higher level of innovation in NPAs. The capital market pressures do not affect the relation between disclosed innovation and future sales, but are associated with higher future costs, leading to lower future earnings. Taken together, our results suggest that the degree of innovation disclosure predicts favorable financial performance, and that capital market pressures drive managers to unveil new products that are more innovative while sacrificing cost efficiency. This would allow myopic managers to reap the benefits of an immediate positive market reaction at NPAs while deferring the higher costs to deliver the new products. Our study contributes to the understanding of managers’ voluntary non-financial disclosure of the innovation in new products.

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

JEL Classification: M41, G34, G35

Suggested Citation

Chu, Jenny and He, Yuan and Hui, Kai Wai and Lehavy, Reuven, New Product Announcements, Innovation Disclosure, and Future Firm Performance (May 18, 2021). Available at SSRN: https://ssrn.com/abstract=3543632 or http://dx.doi.org/10.2139/ssrn.3543632

Jenny Chu (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Yuan He

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting ( email )

Pokfulam Road
Hong Kong, Pokfulam
Hong Kong

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-763-1508 (Phone)
734-936-0282 (Fax)

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