Product introduction effect x 7

Srinivasan et al have tested the relationship between innovations, advertising and stock returns. Their study concludes:

• Regular product introductions can impact stock returns by 0,3%-1%, depending on the innovation level of the product
• In contrast, pioneering innovations (such as the first electric hybrid car) rejoice a stock impact of 4,3%
• Advertising product introductions increase the impact on stock return by 0,1%, while advertising pioneering innovations has an incremental effect of 0,9%
• The perceived quality of the brand has a major effect on financial return of product introductions, where an increased quality results in an additional 2,1% increase in stock returns
• On the contrary, increased promotional expenditures during product introductions actually has a negative impact on stock returns – probably due to price promotions that damage the perceived quality of the product

The study results indicate that managers might consider spending at least 5 times more on innovation as long as the results are ground-breaking to the category and the perceived quality of the brand is sufficient to support the launch. Pioneering innovations in combination with advertising and high brand quality actually increase the pay-off in stock returns by at least a factor 7, compared to basic product introductions.

Source: Srinivasan S, et al. 2009. Product Innovations, Advertising, and Stock Returns. JoM, Vol 73, Issue 1.