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, Forthcoming

78 Pages Posted: 18 May 2021

See all articles by Didem Kurt

Didem Kurt

Northeastern University - Marketing Area

Koen Pauwels

Northeastern University - D’Amore-McKim School of Business

Ahmet C. Kurt

Bentley University - Department of Accountancy; Bentley University - Department of Accountancy

Shuba Srinivasan

Boston University - Questrom School of Business

Date Written: May 17, 2021

Abstract

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

Kurt, Didem and Pauwels, Koen and Kurt, Ahmet C. and Kurt, Ahmet C. and Srinivasan, Shuba, The Asymmetric Effect of Warranty Payments on Firm Value: The Moderating Role of Advertising, R&D, and Industry Concentration (May 17, 2021). International Journal of Research in Marketing, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3848020

Didem Kurt (Contact Author)

Northeastern University - Marketing Area ( email )

Boston, MA 02115
United States

Koen Pauwels

Northeastern University - D’Amore-McKim School of Business ( email )

360 Huntington Ave.
Boston, MA 02115
United States

Ahmet C. Kurt

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States

Shuba Srinivasan

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
6173535978 (Phone)
6173534098 (Fax)

HOME PAGE: http://smgnet.bu.edu/mgmt_new/profiles/SrinivasanShuba.html

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