The impact of technologically new products on stock prices and operating performance

Abstract

Technological development has been regarded as one of the major sources for economic growth and a potent way to help firms create substantial financial value. The development of technologically new products (TNPs), in which advanced or breakthrough technologies are incorporated, has been considered as one of the best ways to help firms grow. TNPs allow firms to leverage their core technologies in other future product introductions and give a signal to firms’ shareholders that they are committed to developing technology innovations. However, the development of TNPs requires substantial R&D investment and is also regarded as a highly risky process. Innovators must face the fact that other firms might imitate their actions, typically earning a share of the profits that is much greater than their initial investment. Studies also have cast doubt on whether firms’ efforts in developing TNPs yield positive economic returns. Therefore it is important to investigate whether the introductions of TNPs follow the prediction that TNPs help enhance firm performance as these products are expected to meet unmet customer demands or there are negative economic consequences due to the high risks and market uncertainties associated with developing and commercializing TNPs. This study aims to fill in this research gap regarding the financial consequences of introducing TNPs. Based on the objective financial data of a sample of 884 firms that announced TNPs, we examined stock market returns, return on assets (ROA), return on sales (ROS), and sales over assets (SOA) of these products. We investigated whether industry characteristics would moderate such financial impacts. In particular, we focused specifically on two major industrial sectors that were under rapid technology development in the past decades -the pharmaceutical and medical devices related industries (PMIs) and the electrical and electronics related industries (EEIs). Through the theoretical lens of knowledge-based view of the firm and adopting the event study research methodology, we first examined the short-term stock market returns to introductions of TNPs. We found that the stock market responded favorably to these introduction announcements. The abnormal returns in the first two days upon the announcements were about 2.11% in the EEIs and 3.39% in the PMIs. Overall, the stock market reacted positively to TNPs announcements in both industries. We further examined the long-term operating performance associated with TNPs. By selecting a portfolio of control firms for each sample firm with similar firm performance and firm size, we compared the performance changes between sample firms and their corresponding control portfolios. We found that TNPs did not necessarily bring higher abnormal financial gains while TNPs led to an abnormal jump of 5.39% in ROA in the PMIs in the first two years of their introductions, they led to a drop of -2.34% in ROA in the EEIs during the same period of time. While stock market reacted positively to TNPs in the EEIs, they did not necessarily lead to higher profits. Industry characteristics is a major factor that affects the abnormal operating performance from TNPs. We also discussed the theoretical and managerial implications of the research findings of this study.