The Asymmetric Effect of Warranty Payments on Firm Value: The Moderating Role of Advertising, R&D, and Industry Concentration
International Journal of Research in Marketing, Vol. 38 (4), pp. 817-837, 2021
78 Pages Posted: 18 May 2021 Last revised: 27 Jan 2022
Date Written: May 17, 2021
Changes in firms’ warranty payments are informative signals that enable investors to form timely expectations about potential changes in product quality. The authors’ survey shows that warranty payments affect potential investors’ product quality assessments and stock investment likelihood. Their quantitative analysis reveals an asymmetric stock market reaction: unanticipated increases in warranty payments (which signal quality “losses”) lower stock returns but unanticipated decreases do not affect stock returns. Two important factors moderate this relationship. First, boosting advertising spending attenuates the negative stock return effect of unanticipated increases in warranty payments. Second, unanticipated decreases in warranty payments, which signal quality “gains”, translate into higher stock returns when the industry has become less concentrated. Interestingly, changes in R&D spending do not moderate investors’ response to unanticipated increases or decreases in warranty payments. The authors advise firms to use advertising to lessen the harm from warranty payment increases and to strongly communicate warranty payment decreases in the face of intensified competition. The authors also caution that offering warranties in general does not ensure greater firm value as declining quality firms that myopically offer warranty programs experience lower firm value than those that do not provide warranties.
Keywords: Product warranty, product quality, marketing signals, firm value, marketing-finance interface
JEL Classification: M31
Suggested Citation: Suggested Citation