Diminishing Returns to New Product Announcements: How the Past Shapes Investors’ Expectations of Firms’ Innovative Output

As firms’ innovation activity increases, investors’ expectations of firms’ future innovative output also increase. How do these expectations form and what is their impact on investor reactions to firms’ new product announcements? Using a comprehensive sample of new product announcements we show that the magnitude of the stock market reaction to a new product announcement is negatively related to a set of firm and market characteristics. Furthermore, we verify that firms’ past history of new product announcements is incorporated in their market value measured prior to each new announcement. Our research can help managers select and time new product announcements in a manner that increases the impact that these announcements have on the value of their firms.