1. How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements The Wealth Effect of New Product Introductions on Industry Rivals Presenters:918101 李欣恬 918109 李曉玲 918109 李曉玲 918110 簡鈺婷 918110 簡鈺婷 918113 陳慈穎 918113 陳慈穎 918118 吳美奇 918118 吳美奇

2. How Does Strategic Competition Affect Firm Values? A Study of New Product Announcements Presenters: 918110 簡鈺婷 918113 陳慈穎

3. 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.

4. 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.

5. 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.

6. The determinates of the wealth Effect of New Product Introductions The specification of the complete relation that we test in this study is as follows: Announcement-period Abnormal Return =β 0 +β 1 CSM +β 2 Tobin’s q +β 3 Free Cash Flow +β 4 Debt Ration +β 5 Firm Size +β 6 R&D Intensity +β 7 High-Technology Industry +β 8 Patent +β 9 Multiple-Product Announcement +β 10 Announcement Frequency +β 11 Interest Rate + error term

7. The determinates of the wealth Effect 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.

8. The determinates of the wealth Effect of New Product Introductions 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.

9. The determinates of the wealth Effect of New Product Introductions A. 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.

10. The determinates of the wealth Effect of New Product Introductions 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 DP A /DS A and DS R. If CSM<0 then competition is in SS If CSM>0 then competition is in SC

11. The determinates of the wealth Effect of New Product Introductions B. Investment Opportunities Expected Sign + ReasonInvestment opportunities hypothesis(Chen and Ho 1997): New product introductions by firms with good investment opportunities are generally regarded as worthwhile.

12. The determinates of the wealth Effect of New Product Introductions 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.

13. The determinates of the wealth Effect of New Product Introductions D. Debt Ratio: Expected Sign + ReasonFirms 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.

14. The determinates of the wealth Effect of New Product Introductions E. Firm Size: Expected Sign - ReasonLarge 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.

15. The determinates of the wealth Effect of New Product Introductions F. Technological Opportunities: Expected Sign +/- ReasonThe 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.

16. The determinates of the wealth Effect of New Product Introductions G. Patent Expected Sign + ReasonNew 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.

17. The determinates of the wealth Effect of New Product Introductions H. Single- or Multiple-product Announcements Expected Sign + ReasonFirms 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.

18. The determinates of the wealth Effect of New Product Introductions I. Announcement Frequency Expected Sign - ReasonIf a firm has a history of making frequent product announcements, then the information value of a new product announcement is likely to be low.

19. The determinates of the wealth Effect of New Product Introductions J. Interest Rate Expected Sign - ReasonRising interest rate can imply a decline in product demand, thereby leading to a reduced cash stream of earnings from the product innovation.

20. Sample and Descriptive Statistics 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.

21. Sample and Descriptive Statistics 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.

22. Sample and Descriptive 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.

23. Operationalizing a Firm ’ s Competitive Strategy Competitive Strategy Measure(CSM): To operationalize the nature of a firm ’ s competitive interaction. The CSM is the correlation coefficient between DP A /DS A and DS R. DP A /DS A : announcing firm ’ s marginal profit to the ratio of change in its net income (DP A )to change in its own net sales(DS A ) DS R : the change in the rivals ’ net sales.

24. Operationalizing a Firm ’ s Competitive 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

25. Control Variable Investment 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.

26. Control Variable Firm 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 industry Dummy=0, otherwise A firm ’ s stock of patents (patent) PS t =0.85PS t-1 +P t PS t : the patent stock in year t P t :the number of patent application in year t

27. Control Variable Dummy variable(MULTI PLE) Dummy=1, multiple-product announcements Dummy=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.

28. E. Sample Characteristics >0

29. E. Sample Characteristics(cont ’ ) 39

30. III. Stock Price Response for the Announcing 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.

31. A. A.Analysis of Subgroups Based on the CSM A R

32. 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.

33. B. Cross-Sectional Regression Analyses Control Var. CSM<0 SS

34. B.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.

35. IV.Stock Price Response for Industry 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.

36. IV.Stock Price Response for Industry Rivals and the CSM (cont ’ ) Wealth loss (Own-firm announcement effect)

37. IV.Stock Price Response for Industry Rivals 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).

38. 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.

39. 5.Concluding Remarks (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.