The differential effect of new product preannouncements in driving institutional and individual investor ownership

• Published in: Journal of business research 2022-10, Vol.149, p.811-823
• Main Authors: Bhattacharya, Abhi, Sardashti, Hanieh
• Format: Article
• Language: English
• Subjects: Exploration; Institutional investor; Media; New product preannouncement (NPPA); Prospect theory; Retail investor
• ISSN: 0148-2963; 1873-7978
• DOI: 10.1016/j.jbusres.2022.05.080

•New Product Pre-announcements (NPPAs) are issued by firms signaling the availability of a new product at a future date.•Retail and institutional investors have varying levels of knowledge and resources and differ in their response to an NPPA.•The differences involve investment horizons, risk taking and influence of external reports in buy decisions.•Retail investors are not ordinarily drawn to an NPPA and prefer riskier firms and shorter time horizons of investment.•Conversely, institutional investors do react to an NPPA and prefer lower-risk stocks.•Analyst reports for institutional investors and business media for retail investors may change such inherent preferences.•Institutional but not retail investors are instrumental in new product release following an NPPA. Firms often use new product preannouncements (NPPAs) to attract investors and inform them about innovative offerings in the pipeline. We observe that the appeal of an NPPA differs for retail and institutional investors. Utilizing prospect theory, we argue that the two types of investors face unequal levels of uncertainty and are dissimilarly loss averse due to varying levels of knowledge and access to resources. This results in varying attitudes towards investment horizon, risk-taking, and preference for information sources. We find investor proclivity toward an NPPA depends on several factors, including the short-term abnormal return, the valence of coverage in media and analyst reports, the firm's risk profile, and the exploration emphasis of the firm. Moreover, we show that higher levels of institutional ownership ultimately contribute to new product success. The results hold implications for strategies that managers can employ to increase investor ownership within the firm to fund innovation.