New Products, Sales Promotions and Firm Value, With Application to the Automobile Industry

two anonymous reviewers of the MSI proposal competition and of the Journal of Marketing for their invaluable comments and suggestions. The paper also benefited from comments by seminar participants at the 2002 Year after year, managers strive to improve financial performance and firm value by marketing actions such as new product introductions and promotional incentives. The current study investigates the short-term and long-term impact of such marketing actions on financial metrics, including top-line, bottom-line and stock market performance. The authors apply multivariate time series models to the automobile industry, where both new product introductions and promotional incentives are considered important performance drivers. Interestingly, while both marketing actions increase top-line firm performance, their long-term effects strongly differ for the bottom line. First, new product introductions increase long-term financial performance and firm value, but promotions do not. Second, investor reaction to new product introduction grows over time, indicating that useful information unfolds in the first two months after product launch. Third, product entry in a new market yields the highest top-line, bottom-line and stock market benefits. Managers may use these results to justify new product efforts and to weigh short-term and long-term consequences of promotional incentives. For most firms, successful new products are engines of growth (Cohen, Eliashberg and Ho 1997). Several frameworks, including the product-life cycle and the growth-share matrix, postulate the need for new products that generate future profitability and prevent the obsolescence of the firm's product line (Cooper 1984, Chaney, Devinney and Winer 1991). Indeed, Arthur D. Little consultants conclude from a Fortune poll that innovative companies achieve the highest shareholder returns (Jonash and Sommerlatte 1999). At the same time, new-product failure rate is high-ranging from 33% to over 60%-and has not improved in the last even commercially successful new products may not financially benefit the firm because of high development and launch costs and fast imitation by competitors (e.g. Bayus et al. 1997; Chaney et al. 1991). By contrast, sales promotions are effective demand boosters that do not incur the risks associated with new products (Blattberg and Neslin 1990). Sales promotions are relatively easy to implement, and tend to have immediate and substantial effects on sales volumes (Hanssens, Parsons and Schultz 2001, Chapter 8). Consequently, it is not surprising that the relative share of promotions in firms' marketing budgets continues to increase (Currim and Schneider 1991). On the other hand, sales promotions rarely have persistent effects on sales, …