New Product Announcements and Shareholder Value

(1)

and Shareholder Value

A Study in the Pharmaceutical Industry

Stijn Broekema

Master Thesis MSc. Marketing Intelligence First Supervisor: Prof. dr. J.E. (Jaap) Wieringa

(2)

Introduction (1)

› Marketing executives are under increasing pressure to be accountable for their investments

› Marketing academics responded to this call by focusing on the link between marketing activities and

shareholder value: marketing-finance interface › MSI third top research priority: “Measuring and

(3)

Introduction (2)

Source: tajpharma.com

› New products are regarded as one of the most important

marketing instruments1

› Yet, what are the effects of new products on shareholder value?

1. Ataman, M. B., Van Heerde, H. J., & Mela, C. F. (2010). “The Long-Term Effect of Marketing Strategy on Brand Sales”, Journal of Marketing

(4)

Research Questions

› What is the effect of new product

announcements on:

• Stock returns? • Systematic risk? • Idiosyncratic risk?

› Do the effects depend on the degree of

(5)

Relevance

› Adds insights to the marketing-finance interface by focusing not only on returns but also explicitly on

systematic and idiosyncratic risk

› Provides executives with insights into how the market values new products on average: improved budget

(6)

(7)

Data

› Data on 113 new product announcements in the U.S. pharmaceutical industry

TABLE 1

Overview of Data and Sources

Data Source

New product announcements Drugs@FDA database

(79 incremental, 34 radical) Company websites

LexisNexis

Stock prices Datastream

Innovativeness Drugs@FDA database

Firm size Datastream

(8)

Methodology

› Stock returns: • Event study

• Carhart four-factor model • Cross-sectional regression

› Systematic risk and idiosyncratic risk: • GARCH

(9)

Results Event Study (1)

TABLE 2

CAAR for Different Event Windows and Samples

Full Sample (n=113) Incremental (n=79) Radical (n=34) Event Window _(t-value)CAAR Pos./Neg. _(t-value)CAAR Pos./Neg. _(t-value)CAAR Pos./Neg.

[-10, 10] 3.66%*** 66/47 3.74%** 47/32 3.47% 19/15 (2.52) (2.22) (1.24) [-5, 5] 3.39%*** 63/50 3.45%*** 44/35 3.24%* 19/15 (3.23) (2.83) (1.60) [-3, 3] 3.29%*** 69/44 3.17%*** 51/28 3.56%** 18/16 (3.93) (3.26) (2.20) [-2, 2] 2.96%*** 71/42 2.90%*** 48/31 3.11%** 23/11 (4.19) (3.52) (2.27) [-1, 1] 3.46%*** 78/35 3.53%*** 55/24 3.29%*** 23/11 (6.31) (5.55) (3.10) [0, 0] 2.07%*** 69/44 1.89%*** 46/33 2.47%*** 23/11 (6.53) (5.15) (4.03) [0, 1] 3.33%*** 81/32 3.36%*** 57/22 3.27%*** 24/10 (7.45) (6.46) (3.77) [0, 2] 2.89% *** _80/33 _2.86%*** _59/20 _2.96%*** _21/13 (5.27) (4.49) (2.80)

*_{p < 0.10 (one-tailed t-test),}**_{p < 0.05 (one-tailed t-test),}*** _{p < 0.01 (one-tailed t-test)}

(10)

(11)

Results GARCH

› Main results:

• Systematic risk increases for incremental innovations

• No effects on idiosyncratic risk › Findings robust for:

• Different model specifications • Different event windows

(12)

Discussion and Implications

› Positive effect on stock returns

• No difference between radical and incremental innovations

› Systematic risk increases after a new product announcement

• Only for incremental innovations › No effects on idiosyncratic risk

(13)

Limitations and Future Research

› Limitations:

• Focus on only one industry and one country

• Sample size of radical innovations relatively small • Short run abnormal returns

› Future research directions: • Preannouncements

(14)

and Shareholder Value

A Study in the Pharmaceutical Industry