The wealth effect of new product introductions on industry rivals

Abstract

While previous studies have documented positive announcement effects of new product introductions on the market value of announcing firms, the effects on their industry rivals depend on the interaction of market expansion effect and market substitution effect. The market expansion effect predicts that the rivals should experience positive wealth effect, whereas the market substitution effect predicts that they should experience negative wealth effect. We find that for the 863 new product announcements in 60 industries from 1987 to 1995, the rivals overall experience small but significantly negative share price response. The results suggest that for the sample as a whole the market substitution effect dominates the market expansion effect. We fur1her demonstrate that the rivals in technologically based industries experience most significantly unfavorable share price response. Finally, we show that the negative share price is more pronounced when (I) the rivals have small er firm size and better investment opportunities, and (2) the announcing firms introduce multiple products that are also of high product newness.