Winston Wei Dou, Finance, The Wharton School; Fernando Stein, PhD Candidate, The Wharton School; Roberto Gomez Cram, London Business School
Abstract: Our research aims to deepen the understanding of (i) how financial markets value product innovation across various firm types, industries, and economic conditions, and (ii) how market sentiment influences the private economic value of product innovation, its impact on firms’ and competitors’ profitability, and the resulting resource reallocation—such as capital, labor, and R&D—both within and across firms.
Our initial findings reveal that market participants have consistently reacted slowly but significantly to product launches, particularly in recent years. We observe large and predictable positive drifts in companies’ stock prices following product launches and announcements, persisting for approximately 30 days. Conversely, competitors exhibit a sharp decline in cumulative returns after a product announcement.
As a key contribution, our paper introduces a systematic LLM-based approach for constructing a comprehensive dataset on new products, including their innovativeness, announcement dates, and release dates. As ongoing effects, we significantly expand our dataset. Our original study consisted of close to 19,000 product versions across 180 publicly-traded firms from 1994 to 2023, focusing primarily on large U.S. companies. We broaden this to include small-cap and mid-cap firms, as well as companies from major international markets such as Europe and Asia. This expansion allows us to investigate whether the patterns we observed hold across different firm sizes and geographical contexts.
We also conduct a more granular analysis of how product characteristics influence market reactions. Our initial study revealed significant variations across different sectors and product types, with software-related sectors demonstrating shorter intervals between product launches compared to non-software sectors. We develop a more sophisticated classification system for product innovations, considering factors such as innovativeness (linked to patent data), degree of novelty, potential market impact, and alignment with current technological trends. This classification is further refined by incorporating patent data and R&D expenditure information to gauge the innovative intensity of each product launch. We also examine how the frequency and timing of product launches within a firm’s lifecycle affect market reactions.
In addition, we expand our analysis of competitive dynamics. Our initial findings revealed a negative impact on competitors’ stock prices following a product announcement. To deepen this investigation, we analyze how industry characteristics—such as concentration, barriers to entry, and market share distribution—influence these reactions. We examine how firms and their competitors adjust profitability, markups, R&D expenses, capital expenditures, labor hiring, and other resource allocations in response to the announcement and release of innovative products. Furthermore, we explore potential spillover effects on related industries and supply chain partners. This analysis is enhanced by constructing detailed industry networks to trace the propagation of innovation shocks across the economy.
Importantly, we investigate the role of information dissemination, especially market sentiment, in shaping market reactions to product launches. This involves analyzing the content and reach of product announcements, media coverage, and social media sentiment. We aim to understand how the effectiveness of a company’s communication strategy around product launches influences market valuation.