Investors' evaluations of price-increase preannouncements

Several firms preannounce their price increases with the expectation that such announcements will be evaluated favorably by investors. However, little is known about the actual effect they have on shareholder value. Accordingly, the authors present the first systematic empirical examination of investors' evaluations of 274 price-increase preannouncements (PIPs). Results show that whereas the average increase in abnormal returns following a PIP is 0.51%, almost 41% of the PIPs result in negative abnormal returns. To explore this heterogeneity, the authors propose a conceptual framework that focuses on three key pieces of information that investors can use when evaluating a PIP: information on the nature (time to implementation and magnitude) of the preannounced price increase, the stated attribution for the preannounced price increase (demand and/or cost based), and information on prior PIP occurrences by the firm and its competitors. Results indicate that PIPs with greater time to implementation, higher own precedence and greater competitive precedence result in lower abnormal returns, while PIPs with higher magnitude and PIPs with an explicit demand attribution result in greater abnormal returns.     

The Effect of Timeliness and Credit Ratings on the Information Content of Earnings Announcements

This paper investigates the impact of timeliness and credit ratings on the information content of the earnings announcements of Greek listed firms from 2001 to 2008. Using the classical event study methodology and regression analysis, we find that firms tend to release good news on time and are inclined to delay the release of bad news. We also provide evidence that the level of corporate risk differentiates the information content of earnings according to the credit rating category. Specifically, firms displaying high creditworthiness enjoy positive excess returns on earnings announcement dates. In contrast, firms with low creditworthiness undergo significant share price erosions on earnings announcement days. We also observe a substitution effect between timeliness and credit ratings in relation to the information content of earnings announcements. Specifically, we find that as the credit category of earnings-announcing firms improves, the informational role of timeliness is mitigated.     

Should “big food” companies introduce healthier options? The effect of new product announcements on shareholder value

In recent years, big food companies, such as Kellogg, PepsiCo, and Kraft have been under increasing pressure to introduce more healthful offerings to their existing product portfolio. Our research seeks to understand if such announcements are viewed favorably by the stock market. Are firms rewarded for introducing healthy new products? Using established methodologies, we are able to isolate what percent of an increase or decrease in a firm’s stock price can be attributed from such an announcement. Our analysis reveals some interesting results on how healthy new product announcements impact shareholder value. Findings suggest that big food companies are indeed rewarded financially for introducing healthy new products into the marketplace, and this increase is higher than when introducing less healthy products. We also find that positive ingredient additions (e.g., added fiber) are more highly valued than negative ingredient reductions (e.g., reduced sugar). We discuss the significant implications of our findings and provide managerial recommendations.     

The Effects of Search-Related and Purchase-Related Mobile App Additions on Retailers’ Shareholder Wealth: The Roles of Firm Size,Product Category,and Customer Segment

Mobile channel additions have been shown to increase consumer-brand relationships, brand satisfaction towards and overall purchasing from a retailer, but what is less apparent is whether shareholders are fully rewarded for retailers’ mobile channel additions. Results from an event study on 115 announcements relating to mobile app additions of publicly traded U.S. retail firms between 2009 and 2016 indicate that the stock market responds generally positively to mobile app additions, but specifically to the two mobile app addition types. Stock market responses to search-related and purchase-related app additions are moderated by firm size, product category, and target customer age. For announcements of search-related apps, the market responds more positively to product retailers than to service retailers, and to small firms than large ones. For announcements of purchase-related apps, the market responds less positively to firms that target younger customers than firms who do not especially target them.     

Signaling quality with new product preannouncements: Vaporware and the role of reference quality

This research develops a signaling game that captures the essential dynamics of new product preannouncements (preannouncement/launch/market feedback). New product preannouncements are preannouncing firms' formal efforts to inform their competitors and customers about the future availability, superior quality and introductory price of their upcoming new products. In a market, two firms compete (entrant preannounces and incumbent responds) across two periods. The entrant has private information about the true quality of a new product (the incumbent and customers do not know it), and this informational asymmetry provides the entrant with a preannouncement dilemma. Should the entrant preannounce and, if the entrant does, should the entrant tell the truth about quality? Preannouncements often get customers who might buy now from a competitor to wait for a higher quality to be available. Therefore, the entrant may have an incentive to bluff the quality of a new product in order to enhance the likelihood of customers' waiting. However, because the quality exaggeration is also likely to increase customers' quality expectations, the entrant may suffer a significant sales penalty if the entrant does not deliver the promised quality. Through the signaling game, this paper derives conditions under which such a bluff does/does not put the preannouncing firm at risk (i.e., this paper derives the separating/pooling equilibria that are the focus of signaling games).     

Do Stock Investors Value Corporate Sustainability? Evidence from an Event Study

This paper analyzes the impacts of index inclusions and exclusions on corporate sustainable firms by studying a sample of US stocks that are added to or deleted from the Dow Jones Sustainability World Index over the period 2002?C2008. The impacts are measured in terms of stock return, risk and liquidity. We cannot find any strong evidence that announcement per se has any significant impact on stock return and risk. However, on the day of change, index inclusion (exclusion) stocks experience a significant but temporary increase (decrease) in stock return. Liquidity deteriorates after the announcement day and bounces back significantly near the day of change. Systematic risk shows little change after announce- ments. But, idiosyncratic risk is higher after announcements. The overall results support Harris and Eitan??s (The Journal of Finance 41(4), 815?C829, 1986) price pressure hypothesis, which posits that event announcement does not carry information and any shift in demand (and hence the corresponding price change and liquidity change) is temporary.     

Acquiring customers through online marketplaces? The effect of marketplace sales on sales in a retailer's own channels

Online retailers are increasingly using third-party online marketplaces (e.g., Amazon, Taobao) as an alternative sales channel to their website. While cross-channel sales elasticities have been established for many sales channel combinations (e.g., adding bricks to clicks), we lack an understanding of whether the use of third-party marketplaces grows or cannibalizes a retailer's sales. Practitioners argue that firms can build their e-commerce business through acquiring customers by selling on the marketplace. Indeed, a marketplace could complement a retailer's offering (e.g., acquiring new customer segments), although inventory effects might mitigate this complementarity. Alternatively, cannibalization might occur from losing customers from one's website to the online marketplace. The present research investigates which of the two opposing forces prevails using a time series of category sales data from one of the largest global marketplace sellers. The authors use vector autoregressive modeling to show that marketplace sales increase sales on a retailer's website (0.014% for every 1% in marketplace sales). This effect is strongest for categories with large choice and low product prices. Acquiring customers through the marketplace might be cheaper than through other sources (estimated at 24% of initial sales). However, online retailers should be aware that this strategy strengthens the marketplace and may have potential negative long-term consequences (e.g., through marketplace control of the customer relationship).     

Market valuation of marketing alliances in East Asia: Korean evidence

This paper investigates firm value created by non-equity marketing alliance announcements of Korean listed firms in terms of stock price reactions to the announcements. We find evidence that on the Korean stock market, the announcements of marketing alliances produce significant positive abnormal returns, which reflect an increase in firm value, around the announcement date. This suggests that firm managers need to seek for various marketing alliances not only for an effective competition in competitive business environments but also for enhancement in shareholder wealth. The increase in firm value has inverse relationship with firm's size and growth opportunity. In particular, marketing alliances with firms based in G7-countries create greater firm value than ones with firms based in the home country. Our study provides investors, firm managers, and academics with valuable implications of an importance of marketing alliances for valuation of firms in other Asian countries as well as in Korea.     

The Shrinking Hand: Why Information Technology Leads to Smaller Firms

We explain the firm downsizing trend of the recent decades by the new abundance of information – the ICT revolution. Production processes differ in their information requirements: while decentralized production by means of market exchanges is information intensive, less information per unit of output is needed in the hierarchically integrated production of firms, and the information/output ratio is decreasing firm size.

We formulate a quantity of information theory of the firm embodying these differences and derive a Coase–Rybczinski effect for the aggregate economy, which predicts a decreasing employment share of large firms and an increasing share of small ones when the aggregate quantity of information increases Panel data regressions and other evidence provide support for this hypothesis.     

Signaling through private equity placements and its impact on the valuation of biotechnology firms

This paper investigates how young, publicly held technology firms contend with information asymmetry, and the hazards it introduces, to acquire the capital necessary for future growth. We ascribe to the view that firms issuing private equity signal the marketplace that managers believe their growth opportunities are undervalued. Consistent with this view, we find significant positive abnormal returns to announcements of private equity placements. We develop theory suggesting that returns are determined by the timing of previous signals. We also argue that the characteristics of the private placement signal, specifically whether private equity is bundled with research partnerships, influence the strength of the signal. Our results largely support our expectations.     

Are sports sponsorship announcements good news for shareholders? A meta-analysis

The number of studies on the marketing–finance interface has escalated in response to increased interest in the value of marketing investments, such as sports sponsorship. This study integrates current research findings and establishes empirical generalizations on how sports sponsorship announcements impact firm value. The empirical literature finds contradicting results on the value shareholders place on these marketing investments. This paper addresses this issue by undertaking a meta-analysis on stock reactions to sport sponsorship announcements, using 3192 of these announcements taken from 36 studies (41 samples). On aggregate, these announcements drew the attention of shareholders since there was a positive and significant cumulative abnormal return (CAR). However, this positive effect was mostly observed in the 1990s and became negative in the 2000s. Overall, shareholders viewed sports sponsorship investments favorably when there was a functional and geographical congruence between sponsors and sponsees. This paper also shows that the differences in the CAR can be explained by controlling for confounding events and host country. The paper concludes by providing potential avenues for further research in sports sponsorship, using the event study method.     

Investment opportunities and dividend omissions

This study examines the market's reaction to dividend omission announcements and finds that if dividends are skipped to preserve cash for good investments, investors do not necessarily regard the omission as negative information. Markets penalize firms for dividend omissions only in the absence of a good stream of investments. In addition, the positive relation between investment opportunity and abnormal stock returns around the announcements is stronger when the level of information asymmetry between management and the rest of the market participants is low. Additional tests reveal that good omitters overcome underperformance faster in the post period. Overall, the results suggest that financial markets interpret differently the information conveyed in the announcement of dividend omission depending on the firm's future prospects.     

Bank Loan Announcements and Borrower Stock Returns: Does Bank Origin Matter?

Banks play a special role as providers of informative signals about the quality and value of their borrowers. Such signals, however, may have a quality of their own as the banks' selection and monitoring abilities may differ. Using an event study methodology, we study the importance of the geographical origin and organization of the banks for the investors' assessments of firms' credit quality and economic worth following loan announcements. Our sample comprises 986 announcements of bank loans to US firms over the period of 1980–2003. We find that investors react positively to such announcements if the loans are made by foreign or local banks, but not if the loans are made by banks that are located outside the firm's headquarters state. Investor reaction is, in fact, the largest when the bank is foreign. Our evidence suggest that investors value relationships with more competitive and skilled banks rather than banks that have easier access to private information about the firms. These results are applicable also to the European markets where regulatory and economic borders do not coincide and bank identities and reputation seem to matter a great deal.     

New product preannouncements,advertising investments,and stock returns

This study examines the synergistic effects of advertising spending and new product preannouncements (NPPAs) on stock market responses. The empirical results indicate that returns of preannouncing firms over both the short- and long-term could be improved by an increase in advertising expenditure. Additionally, the results also show that the positive impacts of earnings and revenues can be enhanced, while the negative influence of trading costs can be reduced, for preannouncing firms with higher advertising expenditures. The holding returns of institutional investors can also increase with greater spending on advertising. Therefore, marketing communication strategies that aim to reduce information asymmetry within NPPAs, coupled with greater advertising expenditures, would yield more favorable investor responses.     

The effect of customer service on retailers’ shareholder wealth: The role of availability and reputation cues

Retailer customer service has been shown to lead to increases in consumer attraction and retention, but what is less apparent is whether shareholders are fully rewarded for retailers’ customer service efforts. Results from an event study on 48 retailer announcements of customer service strategies indicate that customer service increases retailer market values by 1.09 percent on average. The magnitude of this abnormal return suggests that customer service is one of the more effective ways for firms to create shareholder wealth. Further, analysis of the abnormal returns suggests that the shareholder value created by the retailer's customer service is affected by the heuristics and cues used to judge the likelihood of service delivery. Consistent with the availability heuristic, we find that services that are difficult to bring to mind and non-vivid services create significantly less shareholder value. Results further show that the retailer's reputation can also significantly inhibit the customer service's shareholder wealth creation.     

The impact of title event sponsorship announcements on shareholder wealth

Title sponsorships are often considered the crown jewels of sports sponsorship programs. Garnering top media coverage, title sponsorships are prized for both generating brand/product awareness and building image for their sponsors. Not surprisingly, the rising cost of title sponsorships has led some managers to question their underlying value. Accordingly, this study presents an analysis of the impact of 114 title sponsorship announcements of professional tennis and golf tournaments (both men’s and women’s), auto racing (NASCAR), and college bowl games on the stock prices of sponsoring firms. Overall, the results of the study suggest that title sponsorships are generally signed at market-clearing prices. Thus, companies undertaking title sponsorships typically receive exactly what they pay for—except in the case of NASCAR races (which show evidence of increases in share prices). Splitting the sample into new and renewing sponsorships generates results which differ dramatically by sport. Finally, a cross-sectional regression finds congruence of sport and sponsor, sponsorship by high tech firms and sponsorships by large firms all correlated with perceived sponsorship success.     

How firm communication affects the impact of layoff announcements on brand strength over time

Firms usually undertake layoffs to improve financial performance. However, layoffs often have negative effects on various stakeholders, including consumers. In this paper, we examine the magnitude and duration of the potential negative effect of layoff announcements on brand strength. We also examine how a firm's communication accompanying a layoff can potentially counteract the observed negative effect of layoff announcements on brand strength. We compare how advertising communication intensity, social media communication (i.e., brand-initiated tweets), public relation (PR) communication, and communication of CSR initiatives moderate the main effect of layoff announcements on brand strength. Using an error correction model and drawing on 366 announcements of layoff events in Germany, this study identifies the magnitude and duration of the main effect. An examination of five years of weekly consumer brand perception data across multiple industries and domestic and foreign firms shows that advertising communication intensity and social media communication amplify the negative impact of layoff announcements on brand strength. Conversely, PR communication and communication of CSR initiatives help mitigate the negative effect. These findings provide guidance on the best way for firms to design firm communication in the context of layoff announcements.     

EXPANSION STRATEGIES OF U.S. MNCs IN LATIN AMERICA AND THE CARIBBEAN

Significant economic activities in the Latin American and Caribbean countries (LACs) since the debt crisis of the early to mid-1980s have created opportunities for U.S. firms to expand their business presence in the region. This study provides evidence on the shareholders' wealth effects of expansion by U.S. firms into the LACs. Three hundred twenty-two announcements of expansion to the LACs by U.S. firms during 1980 1996 are analyzed using event study methodology. Statistically significant excess returns of 0.52 percent are observed for the average expansion. Analysis of subsamples by mode of expansion shows that announcements of both FDI and non-FDI forms of expansion produce positive significant excess re turns. Significant positive reactions are observed for expansion to Brazil. Cross-sectional regression results provide additional insights into the determinants of wealth effects for these announcements.     

Stock Market Reaction to Quality,Safety, and Sustainability Awards in Logistics

Although quality, safety, and sustainability are important concerns in logistics, managers are sometimes reluctant to invest in these areas because it is not always clear how such investments will benefit firm performance. Empirical literature provides little guidance in the context of logistics as previous studies report mixed findings across a diverse set of industries, which may not be directly applicable to logistics. To address this gap, we conducted an event study to estimate the stock market reaction to quality, safety, and sustainability award announcements in logistics. Based on 244 award announcements during the period 2004–13, we found that stock market participants react positively to announcements of these awards. The market reaction appears to be stronger for sustainability awards than for quality and safety awards. Our results also suggest that the market reacts more favorably to quality and sustainability award announcements for firms with better past financial performance and for smaller firms.     

Strategic alliances by financial services firms

We examine a sample of strategic alliances made by financial services firms during 1986 to 2003. The market reacts positively to the announcements of alliances and seems to incorporate the information about the value of alliances at the time of alliance announcements. We find no evidence of abnormal stock performance after announcements. Our results also suggest that strategic alliances usually are used as a final form of cooperation rather than as a first step towards closer cooperation between firms. For instance, only about 5% of alliances are followed with joint ventures or mergers of partner firms. Nevertheless, strategic alliance firms are more likely to form joint ventures or merge than randomly selected and matched firms. Furthermore, the market reacts more favorably to the alliance announcements by firms that are subsequently acquired by the alliance partners.