Media Endorsements and Stock Returns: Evidence from the Announcement of New Products

Abstract

Unlike previous studies that have focused on the valuation effects of corporate announcements, this thesis which is rooted in the interface between marketing and behavioral finance, examines whether investors’ decisions are influenced by the word content of newspaper reports for new product announcements. By applying a textual analysis, the findings of this research project demonstrate that announcements of new products which financial newspapers cover using positive word content earn significantly higher abnormal returns than firms’ whose new-product announcements were covered without using positive word content by the financial press. The results of this study indicate that the significantly inflated abnormal returns are, on average, 270 basis points higher than the returns for new-product announcements that do not contain positive word coverage from financial newspapers. The evidence also reveals that only positive textual coverage exerts a significant impact on the market’s reaction. In addition, this study documents that announcing firms realize significantly higher abnormal returns than their industry rival firms which do not actively introduce new products into the market place. However, the stock price of rival firms is not adversely affected by the new product announcements of announcing firms. Furthermore, the results of this project illustrate the same but more pronounced pattern of abnormal gains for the technology-based industries. On the other hand, dramatic differences for the non-technology related industries could not be found. Additionally, the results of this research project document that there is an abnormally high Google Search Volume Index (SVI) for firms following positive announcements, suggesting that news with positive word content attract stronger investor attention. Moreover, this evidence suggests that the interaction between investor attention, measured by the SVI, and new- product announcements reveal that there is an inter-play between demand for new

information (i.e., SVI) and supply of new information (i.e., new-product announcements), which shapes the market’s ultimate reaction to news. Overall, the results suggest that the market reacts to the linguistic content of the new-product announcement rather than to the announcement itself. This research contributes to the literature in several ways. First, this is the first study to examine the relation between shareholder value and textual content of new-product announcements. Second, unlike previous studies which ignore the textual and tone content of new-product announcements, the evidence of this thesis, reveals that not every new-product announcement leads to significant gains for stockholders of the announcing firm. Only new-product announcements with positive word content are associated with positive abnormal gains for the announcing firms. Third, gains to the new-product announcing firms significantly exceed those of rival firms. Fourth, this study provides evidence outside of the U.S. market and, hence, avoids the standard criticism that observed empirical regularities arise from data mining. Finally, from a practical perspective, the interesting implication of the empirical analysis of this thesis is that the textual design of new-product announcements plays a critical role in terms of how it affects investors, and, hence, the way they react to such announcements.