New Product Announcements, Innovation Disclosure, and Future Firm Performance

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