The asymmetric effect of warranty payments on firm value: The moderating role of advertising,R&D,and industry concentration |
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| Institution: | 1. D’Amore-McKim School of Business, Northeastern University, United States;2. Bentley University, United States;3. Questrom School of Business, Boston University, United States;1. Department of Marketing, Faculty of Business and Law, Deakin University, Melbourne 3125, Australia;2. Melbourne Business School, University of Melbourne, Australia;3. Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, Shanghai 200030, PR China;4. NYU Shanghai, Shanghai 200122, PR China;5. School of Management, University of Science and Technology of China, Hefei, Anhui 231600, PR China;1. Kelley School of Business, Indiana University, Bloomington, IN 47405, United States;2. School of Business, Jiangsu Normal University, Xuzhou 221009, China;1. W. P. Carey School of Business, Arizona State University, United States;2. Smeal College of Business, Pennsylvania State University, United States;3. Division of Statistics and Data Science, Department of Mathematical Sciences, University of Cincinnati, United States;4. Rutgers Business School, Rutgers University, USA;1. Coles College of Business, Kennesaw State University, United States;2. Smeal College of Business, The Pennsylvania State University, United States |
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| 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. |
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| Keywords: | Product warranty Product quality Marketing signals Firm value Marketing-finance interface |
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