Highlights
- The researchers used a novel, text-based measure of innovation disclosure in new product announcements to show that higher disclosure levels are linked to greater stock market reactions and improved future sales.
- Innovation disclosures generally predict future firm performance, but their effectiveness diminishes when managers have incentives to disclose strategically.
- The research highlights the importance of managerial motives and provides an objective, dictionary-based approach to quantify innovation-related disclosures.
Innovation occurs across all levels of an organisation’s operations, including product design, trial production, market analyses, fixed asset investments that translate into new or improved products, and more. Typically, stakeholders learn about product innovations through a firm’s new product announcements, and the disclosures in these announcements are critical corporate indicators, as sustained product innovation has been linked to firm success and prosperity.
New product announcements that also provide information on managerial decisions offer both information that helps customers appreciate the quality and value of a new product, and provide investors with an understanding of the implications of the product for assessing a firm’s value. Product announcements also reveal the links between research and development (R&D) expenses, patent development, and final product innovations.
The researchers examined whether the extent of innovation disclosed in new product announcements is associated with incremental improvements in future firm performance. They also studied the impact of several managerial disclosure incentives on how much a firm’s level of innovation disclosure can predict a firm’s performance.
To capture the degree of managerial information in innovation disclosure from new product announcements, the researchers developed a novel approach that counts the number of words in each announcement that appear in a constructed dictionary of innovation terms.
The study findings provide insight regarding the properties and usefulness of managerial disclosures that are voluntary and nonfinancial when it comes to new product innovation. To capture the degree of managerial information in innovation disclosure from new product announcements, the researchers developed a novel approach that counts the number of words in each announcement that appear in a constructed dictionary of innovation terms.
Specifically, the empirical analysis employed a measure of the innovation word count on variables that capture innovation inputs and innovation successes (e.g., patent number, value, citations, R&D expenses, trade secrets, and the number of recent new product announcements). This approach allowed the researchers to capture the extent to which managers used innovation-related terms to describe new-product innovations.
To validate that the measure captured economically meaningful disclosure, the researchers also showed that a higher level of innovation disclosure in an announcement was associated with a significantly greater stock market reaction.
To validate that the measure captured economically meaningful disclosure, the researchers also showed that a higher level of innovation disclosure in an announcement was associated with a significantly greater stock market reaction. They found that these disclosures were associated with higher future sales, consistent with innovation disclosure capturing the value of new products to customers.
Study results also showed greater power to predict future sales than traditional innovation data measures, such as R&D expenses data and patent numbers. These findings support the prediction that new product announcements provide information about product innovation over and above that contained in observable innovation inputs and successes.
In other tests, the researchers determined that the degree of innovation disclosure was positively correlated with future earnings but negatively correlated with future selling, general, and administrative expenses. In addition to examining predictive power, the researchers explored the impact of managerial incentives on the ability of innovation disclosures to predict firm performance. They also assessed customers’ ability to monitor and verify innovation through disclosure quality.
The innovation-word dictionary was a glossary based on synonyms from an English-language dictionary, providing a more objective list of innovation terms. The disclosure pool was based on a large archival database of new product announcements issued by the universe of Compustat firms.
Further analyses found that the predictive ability of innovation disclosures weakens when managers have incentives to disclose their innovation information strategically.
This study provides insights into how managers voluntarily reveal qualitative private information to both product and capital market audiences. While innovation disclosure in new product announcements is informative, this study shows that careful interpretation can link innovation disclosure to future firm performance.
Keywords: New product announcements, Innovation, Voluntary disclosure, Incentives, Performance, Qualitative disclosure, Narrative disclosure
* Learn more from the full research article here:
https://link.springer.com/article/10.1007/s11142-024-09820-0