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What is the relationship between innovation and firm value? Does the type of innovation make a difference? To answer these questions, the authors examine how breakthrough and incremental innovations affect three different facets of firm performance: normal profits, economic rents, and total firm risk. They argue that each of these metrics is of independent interest to shareholders and managers and that examining one without the others results in an incomplete picture of the true financial value of innovation. Using data on more than 20,000 new products from consumer packaged goods industries, the authors find that breakthrough innovation is associated with increases in both normal profits and economic rents and that, on average, each breakthrough innovation in the sample is associated with an increase in firm value of $4.2 million. Breakthrough innovation is also associated with increases in the risk of the innovating firm, but this higher risk is offset by above-normal stock returns. In contrast, incremental innovation is associated with increases in normal profits only and has no impact on economic rents or firm risk.

The authors reexamine the relation between customer satisfaction (measured by the American Customer Satisfaction Index) and long-term stock returns using statistical tests that are well specified in the presence of industry clustering. Their results are consistent with those of Fornell, Morgeson, and Huit (2016), who find positive abnormal stock returns for companies with high levels of customer satisfaction. However, the authors also identify three caveats that could affect the robustness of this conclusion. First, the results critically depend on the manner in which industry is defined. Second, because Fornell, Morgeson, and Huit use a proprietary trading strategy that has not been disclosed to the general public, the authors are unable to discern what fraction of their reported performance is due to customer satisfaction as opposed to other characteristics of the trading strategy. Finally, because the authors also find positive abnormal returns for the entire American Customer Satisfaction Index sample, at least some of the performance reported by Fornell, Morgeson, and Huit might be driven by sample characteristics unrelated to customer satisfaction. This article also provides useful guidance for measuring long-term abnormal returns in the presence of industry clustering.

Event studies examine stock price movements around corporate events. These events can be voluntary firm announcements (e.g., new product introduction, alliance formation, channel restructuring) or announcements made by other entities such as regulatory bodies (e.g., FDA approval) or competitors (e.g., new market entry). The event study methodology was developed by finance researchers but has been widely adopted in other fields, including marketing. We review the manner in which event studies have been used in the marketing literature and summarize the current state of knowledge about the design and interpretation of event studies. We provide guidelines for researchers who use this methodology and for readers who draw inferences from results obtained from event studies, and we highlight a few areas where the methodology can be leveraged to help us better understand the financial value of marketing actions.

Every new product introduction entails a branding decision: whether to name the product using a direct extension, a sub-brand, or a new brand. While previous research has focused on how consumers evaluate alternatives in lab settings, or, in studies based on secondary data, on the effectiveness of brand extensions in general, a comprehensive framework of the antecedents and consequences of new product branding decisions is lacking from the literature. The authors propose a theoretical framework that organizes product-, category-, and firm-level determinants of firms’ new product branding decisions, and empirically test the framework’s predictions using a large sample of new product introductions, documenting with real world data how managers choose among three branding alternatives. In addition, using both product-specific and firm-specific valuation metrics, the authors quantify the negative impact on firm value of misaligning the new product branding decisions with the conditions facing new products. Conceptually, the authors bridge the branding and new product performance literatures, and present findings that extend knowledge from behavioral research on brand extensions. Empirically, the authors provide evidence to managers on how to choose brand names for new products in a way that enhances the stock market value of firms.

We examine whether cobranding-the practice of using two established brand names on the same product-increases the market value of parent firms. Using data from the consumer packaged goods industry, we document that the average stock market reaction to the announcement of cobranded new products is approximately +1.0%. We hypothesize that this reaction is significantly higher than it would have been if these same products were single branded, and we find evidence consistent with this hypothesis. We also examine the determinants of this stock market reaction. We find that the consistency between the two brand images, the innovativeness of the product, and the exclusivity of the cobranding relationship significantly increase the market reaction to cobranding announcements. Our findings provide important managerial guidelines for enhancing firm value through cobranding partnerships.

New product preannouncements are strategic signals that firms direct at their customers, competitors, channel members, and investors. They have been touted as effective means of deterring competitor entry, informing potential customers, and even tipping the balance of technological standard battles in favor of the preannouncing firms. However, preannouncements also carry the risks of unwanted competitive reaction and the negative consequences of undelivered promises. From a shareholder value standpoint, do the benefits outweigh the risks of preannouncing? To address this question, the authors build on agency and signaling theories to develop hypotheses about the effects of preannouncements on shareholder value, and they empirically test these hypotheses on a sample of software and hardware new product preannouncements. The findings indicate that the financial returns from preannouncements are significantly positive in the long run. The authors show that preannouncements generate positive short-term abnormal returns only for firms that offer specific information about the preannounced product. They also show that firms earn positive long-term abnormal returns after a preannouncement if they continue to update the market on the progress of the new product. Both the short-term and the long-term returns are further magnified if the reliability of the preannouncement (i.e., the credibility of the preannouncing firm) is high. The findings offer executives of preannouncing firms clear guidelines on how to manage communications in the market to extract financial value from new product preannouncements.

Radical innovations are engines of economic growth and the focus of much academic and practitioner interest, yet some fundamental questions remain unanswered. The authors use theoretical arguments on the risk associated with radical innovations, and the resources needed for them, to answer the following questions on the sources and financial consequences of radical innovation: (1) Who introduces a greater number of radical innovations: dominant or nondominant firms? (2) How great are the financial rewards to radical innovations, and how do these rewards vary across dominant and nondominant firms? (3) Is it only a firm's resources in the aggregate or also its focus and leverage of resources that make its innovations more financially valuable? and (4) Which are more valuable: innovations that incorporate a breakthrough technology or innovations that provide a substantial increase in customer benefits? The authors pool information from a disparate set of sources in the pharmaceutical industry to study these questions. Results indicate that a large majority of radical innovations come from a minority of firms. The financial rewards of innovation vary dramatically across firms and are tied closely to firms' resource base. Firms that provide higher per-product levels of marketing and technology support obtain much greater financial rewards from their radical innovations than do other firms. Firms that have greater depth and breadth in their product portfolio also gain more from their radical innovations.

Corporate acquisitions are strategic actions that loom large in the minds of many senior managers. Despite decades of study, little systematic research exists on a central question: Why do the acquisitions of some firms perform better than those of others? The work that has examined this question has mostly focused on deal-specific variables (i.e., how the acquisitions are conducted). In this article, the authors highlight a firm-specific, marketing-driven variable-namely, product capital-that affects acquisition performance and predicts which firms are better positioned to acquire in the first place. The authors also present a mechanism by which product capital affects performance-namely, through acquirers' superior selection and deployment of targets' innovation potential. This article shows that firms with high product capital (i.e., those with greater product development and support assets) make smarter acquisition decisions. Such firms are better at selecting targets with innovation potential and then deploying this potential to gain competitive advantage. The performance consequences of this superiority in the selection and deployment of target firms manifest in the long-term financial rewards to the acquiring firm. The results of an analysis of acquisitions in the pharmaceutical industry across seven countries and over 11 years (1992-2002) provide empirical support for the arguments.

Investors routinely follow firms' communications and actions to form expectations about the firms' future performance. The authors propose a set of firm and industry characteristics that influence the formation of investor expectations in the context of new product announcements. Specifically, they argue that positive expectations of future innovation output should cause an ex-ante increase in stock prices and a smaller expost market reaction when an actual new product is announced. Using a sample of 4,865 new product announcements made by 826 publicly traded U.S. firms, the authors show that the stock market reaction to a new product announcement measured in a five-day window around the announcement is negatively related to (1) the number of new products previously announced by the firm, (2) the average number of new products previously announced by the firm's competitors, and (3) the average sentiment of past public news about the firm. These three factors are also positively related to the market value of the firm measured immediately before each new announcement, controlling for increases in firm value directly attributable to past new product announcements. In contrast to many articles in the marketing literature that imply that the added value of a marketing event can be fully assessed from the stock market reaction to the announcement of the event, the authors clarify that for recurrent events or events that are part of a firm's broader strategy, this reaction reflects only an update of investors' expectations of future firm performance.