How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth...

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How Does Strategic Competition How Does Strategic Competition Affect Firm Values? Affect Firm Values? A Study of New Product A Study of New Product Announcements Announcements The Wealth Effect of New Product The Wealth Effect of New Product Introductions on Industry Rivals Introductions on Industry Rivals Presenters:918101 Presenters:918101 李李李 李李李 918109 918109 李李李 李李李 918110 918110 李李李 李李李 918113 918113 李李李 李李李 918118 918118 李李李 李李李
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Transcript of How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth...

Page 1: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

How Does Strategic Competition How Does Strategic Competition Affect Firm Values?Affect Firm Values?

A Study of New Product A Study of New Product AnnouncementsAnnouncements

The Wealth Effect of New Product The Wealth Effect of New Product Introductions on Industry RivalsIntroductions on Industry Rivals

Presenters:918101Presenters:918101 李欣恬李欣恬 918109918109 李曉玲李曉玲 918110918110 簡鈺婷簡鈺婷 918113918113 陳慈穎陳慈穎 918118918118 吳美奇吳美奇

Page 2: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

How Does Strategic How Does Strategic Competition Affect Firm Competition Affect Firm

Values?Values?A Study of New Product A Study of New Product

AnnouncementsAnnouncements

Presenters:Presenters:

918110918110 簡鈺婷簡鈺婷918113918113 陳慈穎陳慈穎

Page 3: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

Introduction:Introduction:• Previous studies show that announcements of new product strategies

are generally associated with a positive effect on shareholder value. Chaney et.al(1991),Kelm et.al(1995) Chen and Ho (1997)• But these papers don’t consider the impact of competitive interaction

in an industry. This paper examine whether strategic interaction can also

explain the wealth effects of new product announcement.

Page 4: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

Introduction:Introduction:• In this paper, authors examine the role of

competitive strategy measure (CSM) in explain the wealth effects of specific product announcements, instead of general increase or decrease in R&D spending, and provide further evidence on the impact of strategic interaction on the outcomes of corporate investment decision.

Page 5: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

Introduction:Introduction:• The sample size is much larger, and

we cover a broader set of industries.The sample comprise 384 new product announcements by 101 firms in 39 industries.

• We examine a more comprehensive set of control variable than has been used in previous studies. Ex: patents.

Page 6: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

The determinates of the wealth The determinates of the wealth Effect of New Product Effect of New Product

IntroductionsIntroductions• The specification of the complete

relation that we test in this study is as follows:

Announcement-period Abnormal Return =β0 +β1CSM +β2Tobin’s q

+β3Free Cash Flow +β4Debt Ration +β5Firm Size

+β6R&D Intensity +β7High-Technology Industry

+β8Patent +β9Multiple-Product Announcement

+β10Announcement Frequency +β11Interest Rate

+ error term

Page 7: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

The determinates of the wealth The determinates of the wealth Effect of New Product IntroductionsEffect of New Product Introductions

A. Strategic Competition When a firm announces new product, it

signals to the market that it creates more opportunities for differentiation and competitive advantage, hence, increases its long-term stream of earning and market share. Positive impact on the announcing firm’s share price.

But, the actual impact on the firm that introduces the new product depend on how its rival firms respond to the introduction.

Page 8: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

The determinates of the wealth The determinates of the wealth Effect of New Product Effect of New Product

IntroductionsIntroductions

A. Strategic Competition Competition in strategic substitutes(SS):

If the rival accommodate the announcer by staying put, then the announcer's profit and market share will increase and those of its rivals will suffer a reduction.

Page 9: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

The determinates of the wealth The determinates of the wealth Effect of New Product Effect of New Product

IntroductionsIntroductionsA. Strategic Competition Competition in strategic

complements(SC): By imitating the innovators actions, the

rival can enjoy the free-rider effects by sharing in the profit or reduce the competitive advantage granted to the innovator, or both. If this happens, then the profit and share-price effects on the product innovator could be ambiguous and might even be negative.

Page 10: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

The determinates of the wealth The determinates of the wealth Effect of New Product Effect of New Product

IntroductionsIntroductions• competitive strategy measure (CSM) Sundaram et al’s(1996) CSM operationalize the

nature of a firm’s competitive reaction. The CSM estimates the responsiveness of a firm’s marginal profit to changes in its competitors’ revenues.

The CSM is the correlation coefficient between DPA /DSA and DSR .

• If CSM<0 then competition is in SS If CSM>0 then competition is in SC

Page 11: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

The determinates of the wealth The determinates of the wealth Effect of New Product Effect of New Product

IntroductionsIntroductionsB. Investment Opportunities

Expected Sign

+

Reason Investment opportunities hypothesis(Chen and Ho 1997): New product introductions by firms with good investment opportunities are generally regarded as worthwhile.

Page 12: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

The determinates of the wealth The determinates of the wealth Effect of New Product Effect of New Product

IntroductionsIntroductions• C. Free Cash Flow

Expected Sign

+/-

Reason The free cash flow theory:The potential agency cost of new product investment can be higher for firms with high free cash flow. New product investments by low-free-cash-flow firms increase the chance that the firm will seek new external financing. New external financing provides monitoring, and firm’s willingness to undergo such monitoring can be a favorable signal.The pecking order theory:Support that firms should use internal financing.

Page 13: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

The determinates of the wealth The determinates of the wealth Effect of New Product Effect of New Product

IntroductionsIntroductions• D. Debt Ratio:

Expected Sign

+

Reason Firms with more free cash flow choose higher levels of debt in their capital structure as a credible pre-commitment to pay out the excess cash flow, thus lowering the expected cost of free cash flow.

Page 14: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

The determinates of the wealth The determinates of the wealth Effect of New Product Effect of New Product

IntroductionsIntroductions• E. Firm Size:

Expected Sign

-

Reason Large firms’ new product introductions might have less unanticipated information than those of small firms as information and dissemination is a positive function of firm size.

Page 15: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

The determinates of the wealth The determinates of the wealth Effect of New Product Effect of New Product

IntroductionsIntroductions• F. Technological Opportunities:

Expected Sign

+/-

Reason The value of an innovation should be higher for firms in more technologically based industries.Investors expect new product announcements by firms in R&D-intensive industries and by firm with high R&D intensive relative to their industries rivals.

Page 16: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

The determinates of the wealth The determinates of the wealth Effect of New Product Effect of New Product

IntroductionsIntroductions• G. Patent

Expected Sign

+

Reason New products backed by patents should be more valued to the product announcing firm, since competitors would be less able to come up with a matching response.

Page 17: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

The determinates of the wealth The determinates of the wealth Effect of New Product Effect of New Product

IntroductionsIntroductions• H. Single- or Multiple-product

Announcements

Expected Sign

+

Reason Firms introducing more products are likely to have more R&D expenditures, patented inventions and skilled labor.They likely to be more competitive in the product market and seize more market share.

Page 18: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

The determinates of the wealth The determinates of the wealth Effect of New Product Effect of New Product

IntroductionsIntroductions• I. Announcement Frequency

Expected Sign

-

Reason If a firm has a history of making frequent product announcements, then the information value of a new product announcement is likely to be low.

Page 19: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

The determinates of the wealth The determinates of the wealth Effect of New Product Effect of New Product

IntroductionsIntroductions• J. Interest Rate

Expected Sign -

Reason Rising interest rate can imply a decline in product demand, thereby leading to a reduced cash stream of earnings from the product innovation.

Page 20: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

Sample and Descriptive Sample and Descriptive StatisticsStatistics

A. Sample Design• A sample of initial announcements of new

product by firms listed on either the NYSE or AMEX from Dow Jones News Retrieval Service(DJNES).

• The DJNES database provides news-article and selected stories from The wall Street Journal, Dow Jones News Wire,and Barron’s.

• Sample period:Jan 1991- Dec1995• We include both new products and product

updates.

Page 21: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

Sample and Descriptive Sample and Descriptive StatisticsStatistics

A. Sample Design• The new product announcements have to meet the

following criteria: 1)The announcing firm should not have other

announcements 5 days before and after the initial announcement day.

2)Daily stock return information must be available from CRSP

3)Companies’s financial information must be available from the Compustat files

• The final sample comprises 384 announcement by101 companies

.

Page 22: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

Sample and Descriptive Sample and Descriptive Statistics Statistics

B. Measuring Abnormal Stock Return• Standard event-study methods are

employed to examine stock price response to announcements of new product.

• The abnormal return is calculated by the market model.

• We use the two-day(-1,0) announcement-period abnormal return as the dependence variable in the cross-section analysis.

Page 23: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

Operationalizing a Firm’s Operationalizing a Firm’s Competitive StrategyCompetitive Strategy

• Competitive Strategy Measure(CSM): To operationalize the nature of a firm’s

competitive interaction.

• The CSM is the correlation coefficient between DPA /DSA and DSR .

DPA /DSA : announcing firm’s marginal profit to the ratio of change in its net income (DPA )to change in its own net sales(DSA )

DSR : the change in the rivals’ net sales.

Page 24: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

Operationalizing a Firm’s Operationalizing a Firm’s Competitive StrategyCompetitive Strategy

• 1) CSM <0 : the competition is in strategic

substitutes (SS)• 2) CSM >0 : the competition is in strategic

complement(SC) 3) CSM =0 : the competition is in neither SS nor SC

Page 25: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

Control VariableControl VariableInvestment Opportunities(Q)

Tobin’s q = the ration of the market to book value of the firm’s assets.

Free Cash Flow(FCF)

FCF= (operating income before depreciation – interest expense-taxes- preferred and common dividends)/book value of TA

Debt Ratio(DEBT RATIO)

Debt Ratio= the book value of total debt/ the book value of total equity for the fiscal year prior to the announcement.

Page 26: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

Control VariableControl VariableFirm Size(SIZE)

Firm Size: the logarithm of book value of total asset

R&D intensity (RDI)

The intensity of the firm’s R&D effort/its industry’s for the fiscal year prior to the announcement.

Dummy variable (HILO)

Dummy=1,the announcing firm is in a high-technology industryDummy=0, otherwise

A firm’s stock of patents (patent)

PSt =0.85PSt-1+Pt

PSt : the patent stock in year t

Pt :the number of patent application in year t

Page 27: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

Control VariableControl VariableDummy variable(MULTIPLE)

Dummy=1, multiple-product announcementsDummy=0, single-product announcements

Announcement frequency(FREQ)

the number of new product announcements by an announcing firm within 12 months prior to announcement day

Interest rate variable(INTEREST)

The average of 90-day Treasury bill rates for the announcement year.

Page 28: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

E. Sample CharacteristicsE. Sample Characteristics

>0>0

Page 29: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

E. Sample Characteristics(cont’)E. Sample Characteristics(cont’)

39

Page 30: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

III. Stock Price Response for the III. Stock Price Response for the Announcing Firms and the CSMAnnouncing Firms and the CSM

• In this section,we investigate stock price response for the announcing firms and the CSM .

• Part A:we analyze subgroups based on CSM.

• Part B:the cross-sectional regression analyses .

Page 31: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

A.Analysis of Subgroups Based on the CSM

A R

Page 32: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

A.Analysis of Subgroups Based on the CSM(cont’)

• The results in Table III generally support the theoretical predictions for the role of strategic competition in explaining the wealth effect of product announcements.

• The announcement effect on the share prices for the announcing firms competing in SS is significantly positive but for those competing in SC ,the announcement-period return is not significant.

• Future, the announcement effect is significantly more favorable for the announcing firms competing in SS than for those competing in SC.

Page 33: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

B. Cross-Sectional Regression AnalysesB. Cross-Sectional Regression Analyses

Control Var.

CSM<0

SS

Page 34: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

BB.Cross-Sectional Regression Analyses(cont’).Cross-Sectional Regression Analyses(cont’)

• Explanation on FREQ & RDI• Kelm et al.(1995):frequent announcers are able to

capitalize on follow-on investment projects and generate future investment opportunities.

• Chauvin and Hirschey(1993):the view of R&D spending is an important source of intangible capital and product differentiation.

• The results in Table IV support : the competitive interaction in an industry is an important consideration in assessing the wealth effect of corp.product strategies.

Page 35: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

IV.Stock Price Response for IV.Stock Price Response for Industry Rivals and the CSMIndustry Rivals and the CSM

• In this section, we examine announcement-period AR for the rival firms pooled into an equally weighted portfolio which have same four-digit primary SIC code in Compustat.

Page 36: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

IV.Stock Price Response for Industry Rivals IV.Stock Price Response for Industry Rivals and the CSM (cont’)and the CSM (cont’)

Wealth loss

(Own-firm announcement effect)

Page 37: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

IV.Stock Price Response for Industry Rivals IV.Stock Price Response for Industry Rivals and the CSM (cont’)and the CSM (cont’)

The results in TableV again support the theoretical prediction for the role of the strategic competition in explaining the wealth effect of new product announcements on industry rivals:the announcement effect is more favorable for firms (SS) than (SC).

Page 38: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

V.Concluding Remarks V.Concluding Remarks 1.This study examines the role of strategic

interaction in determining the wealth effect of new product introductions .

2.Announcing firms competing in SS have a positive announcement effect,but SC is not significant.

3.The announcement effect of a new product introduction is significantly negatively related to the competitive strategy measure.

Page 39: How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals.

5.5.Concluding Remarks Concluding Remarks (cont’)(cont’)

4.Industry rivals generally experience small , but significant ,wealth loss when the announcing firm’s abnormal return is positive and the competition is in SS.

5.The overall evidence suggests that the nature of competitive interaction in an industry is an important consideration in assessing the wealth effect of new product strategies.