Rev Manag Sci

DOI 10.1007/s11846-013-0110-8
ORIGINAL PAPER

The relationship between information content

and institutional investors: evidence from new product
preannouncements
Chi-Lin Yang Min-Hsien Chiang Chien-Wei Chen

Received: 8 November 2012 / Accepted: 16 July 2013

Springer-Verlag Berlin Heidelberg 2013

Abstract In this study, we investigate the relationship between information content of new product preannouncements (NPPAs) and trading behaviors of institutional investors. Using hand-collected data from 1995 to 2004, in empirical results,
we find that there is a significantly positive relationship between information content and institutional investors. NPPAs can help institutional investors to evaluate
the potential success of forthcoming new products through signaling enough
information content. As a result, more information cues and earlier NPPAs can
make institutional investors choose these preannouncing firms into their investment
portfolios to increase their holdings and attract more different institutional investors
to hold these shares of preannouncing firms. In addition, we also find the positive
advertising and R&D investment effects. Our findings suggest that managers should
use the information content of NPPA signals to reduce information asymmetry and
help managers to implement their NPPA strategies so as to receive greater financial
support from institutional investors.
Keywords New product preannouncements  Information content 
Institutional investors  Information asymmetry  Signal
JEL Classification

D82  G23

C.-L. Yang (&)  M.-H. Chiang

Institute of International Business, National Cheng Kung University,
No. 1, University Road, Tainan 701, Taiwan
e-mail: r6894103@mail.ncku.edu.tw
M.-H. Chiang
e-mail: mchiang@mail.ncku.edu.tw
C.-W. Chen
Department of International Business, National Chengchi University, Taipei, Taiwan
e-mail: cweichen@nccu.edu.tw

123

C.-L. Yang et al.

1 Introduction
Managers often use new product preannouncements (hereafter NPPAs) as signaling
tools to communicate with market participants. The costs of NPPAs may include
information spillover, damage to the existing products of the preannouncing firms,
and retaliatory responses from competitors (Robertson et al. 1995; Su and Rao
2010). In contrast, the possible benefits include creating demand for new products,
offering information about innovations, helping firms to test new product designs,
and discouraging competitors from participating in the market (Sorescu et al. 2007;
Su and Rao 2010). In addition, the success of new products is likely to attract the
attention of institutional investors, leading to an increase in the market value of the
firm. Due to the importance of institutional investors (Andreas et al. 2012),
managers may use NPPAs to communicate information about the development of
new products with institutional investors, and it is the focus of this study.
More specifically, the goal of this article is to offer a way to assess the
relationship between institutional investors and NPPAs. Building on signaling
theory and agency cost, we develop these hypotheses based on the information
content involved in NPPAs. Because of information asymmetry between preannouncing firms and institutional investors, institutional shareholders have trouble
making their investment decisions. This can be reduced by the information cues
contained within NPPAs and the timing of NPPAs. Thus, the preannouncing firm
has a better understanding of the potential success of the new products through the
information content in NPPAs.
This study investigates institutional ownership in response to the information
content within NPPAs. Institutional ownership can be measured by institutional
holdings and the number of institutional investors (Bushee 1998; Chen et al. 2007;
Hussain 2000). Although information asymmetry may have a substantial, negative
impact on the trading decisions of institutional shareholders, given their lack of
sufficient knowledge about forthcoming new products, it can be reduced by
appropriate NPPAs. The empirical results show that the use of NPPAs has an effect
on the trading decisions of institutional investors. Specifically, our findings indicate
that the more information cues that are included in an NPPA, the less information
asymmetry that institutional investors feel with regard to the new products that are
being preannounced. Thus, the information cues have a positive effect on
institutional ownership. Additionally, we find a positive relationship between the
timing of NPPAs and institutional ownership, showing that early NPPAs allow
institutional investors to verify and digest the information of new products more
completely, and subsequently they are more likely to make favorable investment
decisions. Finally, advertising and R&D expenditures are also found to affect
positively the trading decisions of institutional shareholders. In sum, we suggest that
managers should send earlier and more informative messages to institutional
investors once firms decide to adopt the NPPA strategy, as this can receive positive
responses from institutional investors.
The rest of this article is organized as follows. The next section reviews the
literature on the relationship between NPPAs and institutional investors. Section 3
then describes the sample selection procedure, defines the variables, and provides

123

New product preannouncements

the related statistics. Section 4 presents the empirical results, while Sect. 5 discusses
the implications. Finally, Sect. 6 concludes with a summary of this study.

2 Literature and hypotheses

2.1 Signaling theory
The signaling effect of NPPAs on firm value has been documented in previous
studies (Koku et al. 1997; Mishra and Bhabra 2001; Sorescu et al. 2007). Through
the information released from NPPAs, institutional investors are able to assemble
and evaluate information regarding new products and then make more appropriate
investment decisions. In general, institutional investors, with more capabilities of
processing information compared to individual investors, are better able to make
investment decisions and more likely to increase their holdings in firms that adopt a
strategy of high quality NPPAs. However, firms generally retain some important
information so as to prevent rivals from retaliating or releasing copycat products
before the launch date. This leads to the issue of information asymmetry between
preannouncing firms and investment community (Bergen et al. 1992; Eisenhardt
1989; Schatzel and Calantone 2006; Sorescu et al. 2007).
Potential institutional investors who have no official information regarding new
products may engage in information-gathering activities, and subsequently make
their investments based on the results of these. The agency problem between
preannouncing firms and institutional investors may be serious enough to have a
significant impact on firm value. Accordingly, in order to reduce the agency
problem, some specific information about new products should be made public in
the form of NPPAs. Through these, firms are able to communicate various product
attributes, such as functions, pricing and appearance, to institutional shareholders.
Institutional investors can then evaluate this information content in order to alleviate
the winners curse problem, i.e., adverse selection.
2.2 Information content of NPPAs
2.2.1 NPPA information cues
With regard to the pre-launch information released by firms, there are basically two
important signaling components, namely information cues and NPPA timing. The
former refers to the information content within signals related to the marketing
specifics of products, promotion, pricing and distribution (Heil and Walters 1993;
Keown et al. 1992; Lilly and Walters 1997; Popma et al. 2006). The information
cues for each NPPA event can be categorized as belonging to one or more of the
following ten categories (Keown et al. 1992; Popma et al. 2006; Sorescu et al.
2007): (1) price or value, (2) quality or performance, (3) features or components, (4)
availability, (5) special offer, (6) brand name, (7) package or shape, (8) guarantee or
warranty, (9) new ideas or research findings, and (10) launch plan. Preannouncements may reflect firms attempts to influence the stakeholders in the capital market.

123

C.-L. Yang et al.

Specifically, NPPAs carrying favorable information to the financial community,

including shareholders and institutional investors, aim to systematically affect stock
prices (Eddy et al. 1993; Sorescu et al. 2007).
Postcontractual problems, also referred to as problems of hidden action, may
occur in an existing principal-agent relationship between a firm and its shareholders.
Information asymmetry inherent in the contractual relationship may involve the
shareholders in gathering more information to evaluate and reward the firms
performance so that the firm will be motivated to behave in their interest (Bergen
et al. 1992). In the new product development process, it is more difficult for
shareholders to evaluate the firms actions on the basis of realized outcomes. A
behavior-based evaluation is considered more efficient to reduce the likelihood that
the firm will avoid the best action available, known as the problem of moral hazard
(Eisenhardt 1989). Signaling represents a solution to the agency problem (Bergen
et al. 1992). Specifically, the firm may utilize content-rich NPPAs to demonstrate its
new product development efforts since outputs cannot be observed prior to launch.
By revealing more new product-related message cues, the firms provide shareholders with sufficient information to use or to align with their future market entry. More
content may be employed to build and strengthen these market actors participations
and commitments. Institutional investors, with a greater financial stake in the firm,
tend to monitor and influence corporate decisions more proactively and enthusiastically (Chen et al. 2007). As such, information sharing with institutional investors
through NPPAs may increase their satisfaction with the performance of preannouncing firms and gain their support for the firms future product launch. These
investors will accordingly increase their holdings in these firms.
An increase in the information amount of NPPAs guarantees quality signals and
creates a separating equilibrium (Kirmani and Rao 2000; Sorescu et al. 2007).
Preannouncing high detail about a new product signals the progress far ahead of the
product development curve. Further, receivers are more likely to attend to costly
signals (Busenitz et al. 2005). The signaling theory provides a rationale of
conducting content-rich NPPAs to provide institutional investors with more
information about the capabilities of target firms. The provision of NPPA signals
leads preannouncing firms to a better chance of raising the necessary capital from
their prospective investors who always face difficulty in evaluating the quality of
these firms. These disclosures offer increased knowledge regarding the firms
present performance and future prospects. Holding more information carried in the
NPPAs allows the investors to separate high-quality investments from low-quality
ones (Eddy et al. 1993; Janney and Folta 2003). More institutional investors may be
attracted by a greater number of information cues carried in NPPAs. They will be
more likely to have stakes in the preannouncing firms and their predictions can be
incorporated into stock prices around the event date of preannouncement (Elitzur
and Gavious 2003; Sorescu et al. 2007).
Institutional investors accordingly collect and assess the NPPA information to
confirm (or disconfirm) their anticipations. They judge the value of the firms
securities by making inferences regarding its performance and future direction
(Eddy et al. 1993). It is therefore hypothesized that the amount of institutional

123

New product preannouncements

holdings and the number of institutional investors increase as the amount of

information cues increases in NPPAs.
Hypothesis 1a Institutional holdings increase in NPPA firms which release more
information cues.
Hypothesis 1b The number of institutional investors increases in NPPA firms
which release more information cues.
2.2.2 NPPA timing
The timing of NPPA refers to the time point when a firm chooses to release productrelated information prior to a launch (Lilly and Walters 1997). A crucial choice for
signaling is when to signal (Gulati and Higgins 2003). The NPPA timing is measured as
the length of time from the preannouncement day to the actual new product launch day
in this study. Early NPPAs, defined as when there is a longer time between the
preannouncement and the actual launch of the product, could make existing, similar
products obsolete, and potential customers would delay their purchases until the new
item is available for sale. The rationale of early NPPAs lies in providing key
stakeholders with more time to decipher or interpret the information and understand the
senders intentions. Increased stakeholder understanding generally increases the
likelihood of action that will benefit the preannouncer (Lilly and Walters 1997).
The pre-diffusion process started by early NPPAs is critical to the generation of
an installed base. Lilly and Walters (1997) contend that early NPPAs are
particularly appropriate for key stakeholders to become familiar with the products.
The sheer number of existing shareholders may serve as a quality signal for the
preannounced product, helping other investors reduce investment uncertainty and
fear associated with early investment. Early NPPAs can also cause widespread
media attention at information release events (Popma et al. 2006). Sorescu et al.
(2007) specifically argue that investors need considerable time to evaluate
respective preannouncements in order to estimate the level and risk of incremental
future cash flows and understand other stakeholder responses. Early NPPAs increase
the time of evaluation. Accordingly, the timing influences the extent to which
institutional investors can decipher and interpret NPPAs so as to understand the
intentions of the preannouncers and act in the expected way. Earlier NPPAs allow
them to allocate their funds more effectively and efficiently in response to the
introductions of preannounced products. As a result, existing institutional shareholders may increase their holdings and other institutional investors may initiate
their investments in the firms. The hypotheses concerning the investment behavior
of institutional investors are therefore proposed as follows:
Hypothesis 2a Institutional holdings increase in NPPA firms which adopt an early
NPPA strategy.
Hypothesis 2b The number of institutional investors increases in NPPA firms
which adopt an early NPPA strategy.

123

C.-L. Yang et al.

3 Sample selection, variable definitions, and statistics

3.1 Sample selection
The sample consists of firms that announced NPPAs and subsequently launched new
products from 1995 to 2004, and is collected from the LexisNexis Academic database.
Following Chen et al. (2002) and Chen et al. (2005), we search for news articles with
words and phrases commonly used to describe NPPAs, such as launch, introduce,
unveil, preannounce, new product, and to market. Originally, a sample of
240 NPPAs was obtained. In order to ensure against confounding events, NPPA events
are excluded if the firm made other announcements, such as dividends and earnings,
within a 5-day window surrounding the NPPA event day. Moreover, those firms without
any data in the Compustat or Center for Research in Security Prices (CRSP) databases
are also disregarded, as these could not be used for the analyses requiring financial data.
After applying these three data screening criteria, 198 NPPA events remain in the
sample.
We have two measures to proxy institutional ownership in this study. One measure is
the institutional holdings (Grinblatt and Keloharju 2001; Huberman 2001), and the
other measure is the number of institutional investors (Ackert and Athanassakos 2003;
Amihud and Li 2006; Grullon et al. 2004). The variable of institutional holdings is the
percentage of shares held by institutional shareholders relative to the total shares
outstanding for each preannouncing firm while the number of institutional investors is
the count of different institutional shareholders holding the preannouncing firms
shares. The institutional holdings and number of institutional investors are collected
from the Thomson Reuters CDA/Spectrum database. The number of institutional
investors measures the breadth of institutional ownership, while the institutional
holdings capture the depth of institutional ownership (Bushee 1998; Chen et al. 2007;
Hussain 2000). There is a subtle difference between these two measures although their
correlation is high (0.76). High institutional holdings mean that institutional investors
show their support by increasing their holdings in a firm when they are satisfied with its
performance. Institutional investors have a greater financial stake in the firm, and thus
might exert much stronger monitoring power and more profoundly influence
management decisions (Chen et al. 2007). On the other hand, a larger number of
institutional investors could increase the trading liquidity of a firms stock (Blume and
Keim 2012), and the institutional holdings measure could not provide information about
this. The average holding in a firm becomes smaller with an increase in the number of
institutional investors, and this can decline the impact of illiquidity due to the
potentially reduced trading size. The number of institutional investors is thus important
in explaining the trading liquidity.
3.2 Control variables
The market value of equity (MV), total assets (TA), advertising intensity (ADI), R&D
intensity (RDI), number of shares outstanding, operating income before depreciation,
and number of common shareholders data are obtained from the Compustat database.
The TA are the fiscal year-end value of TA for the fiscal year prior to the NPPA. The

123

New product preannouncements

MV is equal to the number of shares outstanding multiplied by the share price. The ADI
is the advertising expenditure per dollar of sales for the fiscal year prior to the NPPA.
The RDI is the R&D expenditure per dollar of sales for the fiscal year prior to the NPPA.
The return on assets (ROA) is defined as the operating income before depreciation
scaled by TA. The Herfindahl index (HI), defined as the sum of the squared fraction of
industry sales for the fiscal year prior to the NPPA, is used to measure the competitive
intensity of the industry that a firm operates within. The higher the value of the index,
the lower the competitive intensity, and when it equals one, this means that there is a
monopoly market. The industries are identified based on the four-digit SIC codes in the
Compustat database. Firm age (FA) is the number of years the firm has been listed in the
CRSP database.
3.3 Summary statistics
Table 1 provides the descriptive statistics of the sample. First, the mean and median of
institutional holdings are 76.36 and 54 %, respectively, while the mean and median of the
number of institutional shareholders are 78.63 and 36, respectively. Institutional investors
have relatively large holdings in NPPA firms, indicating that they tend to allocate their
funds to those companies that are more active with regard to publicizing their new
products. The mean and median of NPPA cue are 5.04 and 5, while the mean and median
of NPPA timing are 128.52 and 121 days, respectively. This means that NPPA firms are
willing to release information regarding new products that includes data on around half of
the 10 categories of cues. Additionally, the NPPA firms, on average, make their
preannouncements half a year before the new product is actually for sale. The NPPA firms
Table 1 Summary statistics
Variables

Mean

SD

Median

Institutional holdings (%)

76.36

123.52

54.00

The number of institutional investors

78.63

155.32

36.00

NPPA cue

5.04

NPPA timing (day)

128.52

Market value of equity (billion US$)

1.66

5.00

119.82

121.00

3.27

3.16

2.12

Total assets (billion US$)

2.11

2.84

1.03

Firm age (year)

12.18

6.38

7.00

Advertising intensity

0.18

0.27

0.12

R&D intensity

0.27

0.38

0.16

Return on assets

0.06

0.26

0.12

Herfindahl index

0.23

0.21

0.22

Observations

198

The table reports the descriptive statistics of the sample. The sample data is collected from 1995 to 2004.
The institutional holdings and number of institutional investors data are collected from Thomson Reuters
CDA/Spectrum. NPPA information variables include the number of NPPA cue and NPPA timing from
LexisNexis Academic. In addition, firm characteristics including the market value of equity, total assets,
firm age, advertising intensity, R&D intensity, return on assets, and Herfindahl index are collected from
Compustat and CRSP

123

C.-L. Yang et al.

Table 2 The univariate analysis of institutional holdings
Panel A

Mean (%)

Pre-NPPA

52.24

Post-NPPA

76.36

Difference

24.12**

Panel B

Market value quintile

NPPA cue quintile

Smallest

Largest

Smallest

5.12

6.36

8.25

10.83

35.63

6.23

7.79

9.42

14.34

48.88

8.25

8.86

11.38

18.46

55.63

10.14

11.23

15.64

25.38

65.68

Largest

28.25

32.46

48.26

54.45

88.56

Difference (largest-smallest)

23.13**

26.10**

30.01**

43.62***

52.93***

Panel C

Market value quintile

NPPA timing quintile

Smallest

Largest

Smallest (late)

6.03

7.25

8.15

10.14

36.24

6.89

8.17

9.52

16.22

44.18

8.23

10.23

11.36

21.16

56.43

10.13

14.36

16.28

28.56

63.36

Largest (early)

28.27

38.46

42.23

53.66

87.38

Difference (largest-smallest)

22.24**

31.21**

33.08**

43.52***

51.14***

This table presents the portfolio means of institutional holdings by the quintiles of market value of equity,
NPPA cue, and NPPA timing. In panel A, we examine the difference in institutional holdings after
NPPAs. We double sort firms into quintiles by first using the NPPA cue and sorting firms according to
their market values given the NPPA cue quintile. Panel B presents the institutional holdings results
according to the NPPA cue and market value sorts. Similarly, the NPPA timing subgroups are repeated in
panel C. The reported numbers are based on means. The institutional holdings data is collected from
Thomson Reuters CDA/Spectrum and the market value of equity data is collected from Compustat. The
significance levels of the differences are based on a two-tailed t test
***, **, and * Statistical significance at the 1, 5, and 10 % levels, respectively

have an average age of 12.18 years, and their average size is US$2.11 billion. The NPPA
firms spend an average of 18 cents on advertising activities and an average of 27 cents on
R&D investments for every dollar of sales. In addition, the competition is intense for the
NPPA firms examined in this study, as the average HI is 0.23, far below 0.5.

4 Empirical results
4.1 The univariate analysis
Table 2 presents the results of the univariate analysis of institutional holdings. Panel A
indicates that institutional holdings increase significantly after firms announce NPPAs.

123

New product preannouncements

Table 3 The univariate analysis of the number of institutional investors
Panel A

Mean

Pre-NPPA

45.35

Post-NPPA

78.63

Difference

33.28**

Panel B

Market value quintile

NPPA cue quintile

Smallest

Largest

Smallest

5.23

10.14

21.23

31.12

41.87

8.36

12.58

22.26

33.45

54.42

10.58

14.64

25.37

36.68

71.38

13.15

18.12

28.24

41.22

106.27
124.68

Largest

15.34

22.37

35.68

62.39

Difference (largest-smallest)

10.11*

12.23*

14.45*

31.27**

Panel C

Market value quintile

NPPA timing quintile

Smallest

82.81***

Largest

Smallest (late)

5.87

10.32

22.01

33.86

40.81

8.81

13.32

23.52

35.28

52.36

11.23

15.37

26.47

38.62

75.38

14.65

19.15

29.33

42.32

110.51

Largest (early)

16.43

23.84

36.72

65.83

128.47

Difference (largest-smallest)

10.56*

13.52*

14.71*

31.97***

87.66***

This table presents the portfolio means of the number of institutional investors by the quintiles of market
value of equity, NPPA cue, and NPPA timing. In panel A, we examine the difference in the number of
institutional investors after NPPAs. We double sort firms into quintiles by first sorting firms using the
NPPA cue and then according to their market values given the NPPA cue quintiles. Panel B shows the
number of institutional investors according to the NPPA cue and market value sorts. Similarly, the NPPA
timing subgroups are repeated in panel C. The reported numbers are based on means. The number of
institutional investors data is collected from Thomson Reuters CDA/Spectrum and the market value of
equity data is collected from Compustat. The significance levels of the differences are based on a twotailed t test
***, **, and * Statistical significance at the 1, 5, and 10 % levels, respectively

The NPPA strategy can help preannouncing firms to attract the attention of institutional
shareholders, whose subsequent investment decisions would favor these companies. In
order to understand the influences of the information included in NPPAs, we double sort
the firms into quintiles by first sorting them using the information cues or NPPA timing,
and then sorting them according to their market values given the information cue
quintiles. Panel B reports the institutional holdings results according to the information
cue and market value sorts. The empirical results show that the level of institutional
holdings increases when there is a greater number of information cues for a given market
size. This positive relationship between information cues and institutional holdings is
monotonic, and it can be assumed that institutional investors have more confidence in
their investment decisions when they receive more information cues. Panel C presents the

123

C.-L. Yang et al.

results when the data is sorted by NPPA timing and market value. It can be seen that early
NPPAs encourage institutional investors to significantly increase their holdings. This
confirms that early NPPAs are able to give institutional investors more time to digest the
related information of new products, thus resolving the agency problem and subsequently
leading them to allocate more investments to such companies.
Table 3 presents the empirical results for the number of institutional investors for the
NPPA firms. As in Table 2, the number of institutional investors increases significantly
once a firm preannounces a new product. We further double sort firms, first by
information cues or NPPA timing and then by their market value. The results for the
information cues sort are listed in Panel B. Similar to the institutional holdings results in
Table 2, Panel B shows that there is a significant increase in the number of institutional
investors when more information cues are released in NPPAs. Moreover, the results for
the NPPA timing sort in Panel C confirm those in Table 2, which the number of
institutional investors increases significantly for earlier NPPAs.
Overall, the results shown in Tables 2 and 3 indicate that more information cues
and earlier NPPA timing are significantly and positively related to institutional
ownership. These results support our hypotheses.
4.2 Regression analysis
The results of the univariate analysis in the previous subsection demonstrate that there is
a positive relationship between information content and institutional ownership. In this
subsection, we take a further step to analyze the relationship between these with a
consideration of other variables that are believed to affect institutional ownership, based
on the following cross-sectional regressions:
HOL a0 a1 CUE a2 lnTIME a3 lnMV a4 lnTA
a5 lnFA a6 ADI a7 RDI a8 ROA a9 HI e

NUM b0 b1 CUE b2 lnTIME b3 lnMV b4 lnTA b5 lnFA

2
b6 ADI b7 RDI b8 ROA b9 HI g
where the dependent variables are the percentage of institutional holdings relative to
total shares outstanding (HOL) and the number of different institutional investors
(NUM), and the independent variables are NPPA cue (CUE) and NPPA timing
(TIME). To control for any confounding effects, we use some control variables in
the regressions, and these include the MV, TA, FA, ADI, RDI, ROA, and HI.
Table 4 presents the empirical results for Eqs. (1) and (2). For the institutional
holdings equation, both coefficients of information cues and NPPA timing are
significantly positive. Additionally, more expenditures on advertising and R&D
attract significantly more institutional investments. Meanwhile, institutional shareholders tend to allocate more funds to larger firms. These findings confirm not only
the positive relationship between information content and institutional holdings, but
also the picture provided by the summary statistics. The results for the relationship
between information content and the number of institutional investors demonstrate
the same pattern found in the institutional holdings equation. That is, the more

123

New product preannouncements

Table 4 The regression analysis of institutional holdings and the number of institutional investors
Independent variables

Constant
CUE
Ln(TIME)
Ln(MV)
Ln(TA)
Ln(FA)
ADI
RDI
ROA
HI

Dependent variables
HOL

NUM

2.162

1.285

(2.341)

(2.082)

0.512**

0.551**

(0.258)

(0.273)

0.611**

0.637**

(0.309)

(0.318)

0.541**

0.553**

(0.267)

(0.271)

0.428**

0.415**

(0.212)

(0.208)

0.136

0.109

(0.141)

(0.123)

0.337**

0.322**

(0.165)

(0.162)

0.435**

0.411**

(0.217)

(0.208)

0.087

0.073

(0.073)

(0.054)

0.156

0.144

(0.147)

(0.127)

Number

198

198

Adjusted R2 (%)

7.9

7.5

F statistic

6.481***

6.428***

The dependent variables are the percentage of institutional holdings relative to total shares outstanding
(HOL) and the number of different institutional investors (NUM). The independent variables include
NPPA cue (CUE) and NPPA timing (TIME). These control variables are the market value (MV), total
assets (TA), firm age (FA), advertising intensity (ADI), R&D intensity (RDI), return on assets (ROA), and
Herfindahl index (HI). The model is estimated using the ordinary least squares single equation. The table
reports each coefficient with standard errors in parentheses and the values of adjusted R2 and F statistic in
the final two rows. Each equation is highly significant, with the p value for all F statistics being \0.01
***, **, and * Statistical significance at the 1, 5, and 10 % levels, respectively

information cues, the greater the number of institutional investors. The same
positive relationship applies to the effect of NPPA timing. Moreover, the higher the
expenditures on advertising and R&D, the greater the number of institutional
investors.

5 Discussion and implications

This study examines the investment behavior of institutional investors in relation to
the information content of NPPAs. We find that the amount of institutional holdings

123

C.-L. Yang et al.

is positively and significantly related to the information content of NPPAs. This

means that more information cues in the NPPAs and earlier announcements may
attract institutional investors to increase their holdings in the preannouncing firms.
Consequently, a potentially stronger monitoring effect on the management of NPPA
firms is expected in this situation. Additionally, the number of institutional investors
is positively related to the amount of information content in NPPAs, indicating that
more institutional investors may be attracted by a greater number of information
cues carried in NPPAs and the execution of earlier preannouncements. This, in turn,
will increase the trading liquidity of focal stocks.
This study has an important contribution to research on institutional investors.
We extend previous studies on the relationship between NPPAs and firm value.
These studies show that there are positive and significant responses to NPPAs (Koku
et al. 1997; Mishra and Bhabra 2001; Sorescu et al. 2007). Our study suggests that
the preannouncing firms can attract more institutional investors to increase their
holdings through more information cues involved within NPPAs and earlier NPPAs.
This is that there is an information signal effect of NPPAs to influence firm value
possibly through institutional investors.
These results have two managerial implications regarding how companies should
position themselves to influence other market participants in the market. The first
implication is that managers should wait until they have enough accurate
information about their new products before they preannounce, as it reduces
information asymmetry associated with such preannouncements. This may provide
the clear picture of forthcoming new products with consumers to increase their
purchases in the future. The other implication is that once managers have enough
accurate information they should then make the NPPA as soon as possible, as this
may help the firm to obtain a first-mover advantage in the market, by developing
entry barriers or key product specifications (Calantone and Schatzel 2000). In this
way, consumers may positively adjust their expectations about the forthcoming
product and so delay their purchases now, while competitors may be pressured to
follow the standards of the focal product, and thus the information included in
NPPAs could influence not only institutional investors, but also other market
participants.
Our study has some limitations that could be addressed by further research. First,
we only collect these firms undertaking both NPPAs and new product introductions
to examine in this study. It would be useful to extend our study to compare with
other samples. For example, when the firms only use NPPAs without new product
introductions or the firms directly adopt new product introductions without NPPAs,
it is worthwhile to study how institutional shareholders make their investment
decisions in response to the other firms. Second, although we have low R2 values in
the regressions, due to the sampling period and variables used in this study, it would
be worthy to examine other related hypotheses by extending the sampling period or
increasing other variables. Finally, this study only investigates the investment
behavior of institutional investors. It would be an interesting issue to enlarge on
several key market participants for further research. For example, the existence of
an information effect of NPPA signal, possibly through institutional investors, could
affect firm value. Therefore, important market participants, such as consumers,

123

New product preannouncements

individual investors, analysts, and the rival firms may all be hypothesized to affect
the market value of preannouncing firms, and so would be investigated in future
research.

6 Conclusions
This study provides an analysis of institutional shareholders in reaction to the
information content of NPPAs. Although institutional investors are more sophisticated than individual investors, the issue of information asymmetry still exists,
since firms usually withhold some important information regarding their new
products for strategic reasons. We carry out an empirical analysis of the relationship
between institutional investors investment decisions and how firms implement their
NPPA strategies. Specifically, the information cues involved within NPPAs, as well
as the timing of such preannouncements, are examined to see how these affect the
trading decisions of institutional shareholders.
The empirical results indicate that institutional ownership increases in NPPA
firms which release more information or make earlier preannouncements. More
information cues reduce information asymmetry from new products, while earlier
preannouncements give institutional investors more time to formulate their trading
strategies. The findings can be explained based on signaling theory and agency cost,
which state that when institutional investors face information asymmetry of
forthcoming new products, they have difficulty in making investment decisions in
reaction to the new products. Therefore, in order to reduce agency costs, firms
should use NPPA signals to communicate more complete information to institutional investors. However, this may have some disadvantages, such as retaliatory
reactions from rival firms or copycat products. Institutional shareholders should
consider the costs and benefits NPPAs by closely examining the information
contained in such preannouncements, and thus assessing which preannouncing firms
are worth investing in. It is anticipated that these findings presented in this study
could help managers to implement better NPPA strategies, so as to receive greater
financial support from institutional investors.

References
Ackert LF, Athanassakos G (2003) A simultaneous equations analysis of analysts forecast bias, analyst
following, and institutional ownership. J Bus Financ Acc 30:10171041
Amihud Y, Li K (2006) The declining information content of dividend announcements and the effects of
institutional holdings. J Financ Quant Anal 41:637660
Andreas JM, Rapp MS, Wolff M (2012) Determinants of direct compensation in two-tier system:
evidence from German panel data. Rev Manag Sci 6:3379
Bergen M, Dutta S, Walker OC (1992) Agency relationships in marketing: a review of the implications
and applications of agency and related theories. J Mark 56:124
Blume ME, Keim DB (2012) Institutional investors and stock market liquidity: trends and relationships.
Working Paper, University of Pennsylvania

123

C.-L. Yang et al.

Busenitz LW, Fiet JO, Moesel DD (2005) Signaling in venture capitalistnew venture team funding
decision: does it indicate long-term venture outcomes? Entrepreneurship Theory Pract 29:112
Bushee BJ (1998) The influence of institutional investors on myopic R&D investment behavior. Acc Rev
73:305333
Calantone R, Schatzel K (2000) Strategic foretelling: communication-based antecedents of a firms
propensity to preannounce. J Mark 64:1730
Chen SS, Ho KW, Ik KH, Lee C (2002) How does strategic competition affect firm values? A study of
new product announcements. Financ Manag 31:6784
Chen SS, Ho KW, Ik KH (2005) The wealth effect of new product introductions on industry rivals. J Bus
78:969996
Chen X, Harford J, Li K (2007) Monitoring: which institutions matter? J Financ Econ 86:279305
Eddy AR, Fletcher HD, Margenthaler CR, Reinhart WJ (1993) Financial signaling and new product
announcements. Mid-Atl J Bus 29:97108
Eisenhardt KM (1989) Agency theory: an assessment and review. Acad Manag Rev 14:5774
Elitzur R, Gavious A (2003) Contracting, signaling, and moral hazard: a model of entrepreneurs, angels
and venture capitalists. J Bus Ventur 18:709725
Grinblatt M, Keloharju M (2001) How distance, language, and culture influence stockholdings and trades.
J Financ 56:10531073
Grullon G, Kanatas G, Weston JP (2004) Advertising, breadth of ownership, and liquidity. Rev Financ
Stud 17:439461
Gulati R, Higgins MC (2003) Which ties matter when? The contingent effects of interorganizational
partnership on IPO success. Strateg Manag J 24:127144
Heil OP, Walters RG (1993) Explaining competitive reactions to new products: an empirical signaling
study. J Prod Innov Manag 10:5365
Huberman G (2001) Familiarity breeds investment. Rev Financ Stud 14:659680
Hussain S (2000) Simultaneous determination of UK analyst following and institutional ownership. Acc
Bus Res 30:111124
Janney J, Folta T (2003) Signaling through private equity placements and its impact on the valuation of
biotechnology firms. J Bus Ventur 18:361380
Keown CF, Jacobs LW, Schmidt RW, Ghymn K (1992) Information content of advertising in the United
States, Japan, South Korea, and the Peoples Republic of China. Int J Advert 11:257267
Kirmani A, Rao A (2000) No pain, no gain: a critical review of the literature on signaling unobservable
product quality. J Mark 64:6679
Koku PS, Jagpal HS, Viswanath PV (1997) The effect of new product announcements and
preannouncements on stock price. J Mark Focus Manag 2:183199
Lilly B, Walters R (1997) Toward a model of new product preannouncement timing. J Prod Innov Manag
14:420
Mishra DP, Bhabra HS (2001) Assessing the economic worth of new product preannouncement signals:
theory and empirical evidence. J Prod Brand Manag 10:7593
Popma WT, Waarts E, Wierenga B (2006) New product announcements as market signals: a content
analysis in the DRAM chip industry. Ind Mark Manag 35:225235
Robertson TS, Eliashberg J, Rymon T (1995) New product announcement signals and incumbent
reactions. J Mark 59:115
Schatzel K, Calantone R (2006) Creating market anticipation: an exploratory examination of the effect of
preannouncement behavior on a new products launch. J Acad Mark Sci 34:357366
Sorescu A, Shankar V, Kushwaha T (2007) New product preannouncements and shareholder value: dont
make promises you cant keep. J Mark Res 44:468489
Su M, Rao V (2010) New product preannouncement as a signaling strategy: an audience-specific review
and analysis. J Prod Innov Manag 27:658672

123