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O R I G I N A L P A P E R

The relationship between information content

and institutional investors: evidence from new productpreannouncements

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 con-

tent of new product preannouncements (NPPAs) and trading behaviors of institu-

tional investors. Using hand-collected data from 1995 to 2004, in empirical results,

we find that there is a significantly positive relationship between information con-

tent 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 canmake 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. ChiangInstitute of International Business, National Cheng Kung University,No. 1, University Road, Tainan 701, Taiwane-mail: [email protected]

M.-H. Chiange-mail: [email protected]

C.-W. ChenDepartment of International Business, National Chengchi University, Taipei, Taiwan

e-mail: [email protected]

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Rev Manag SciDOI 10.1007/s11846-013-0110-8


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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 prean-

nouncing 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 positiveresponses 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

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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 makeinvestment 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 betweenpreannouncing 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 winner’s 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. Preannounce-

ments may reflect firms’ attempts to influence the stakeholders in the capital market.

New product preannouncements

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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 firm’s

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 firm’s 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 itsnew product development efforts since outputs cannot be observed prior to launch.

By revealing more new product-related message cues, the firms provide sharehold-

ers 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 enthusi-

astically (Chen et al. 2007). As such, information sharing with institutional investors

through NPPAs may increase their satisfaction with the performance of prean-

nouncing firms and gain their support for the firms’ future product launch. Theseinvestors 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 firm’s

securities by making inferences regarding its performance and future direction

(Eddy et al. 1993). It is therefore hypothesized that the amount of institutional

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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 product-

related 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 dayin 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

sender’s 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 areparticularly 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 share-

holders 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.


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3 Sample selection, variable definitions, and statistics

3.1 Sample selection

The sample consists of firms that announced NPPAs and subsequently launched newproducts 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 firm’sshares. 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 firm’s 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

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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 theirpreannouncements 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 1.66 5.00

NPPA timing (day) 128.52 119.82 121.00Market value of equity (billion US$) 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 ReutersCDA / 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 fromCompustat and CRSP


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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.

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 2 3 4 Largest

Smallest 5.12 6.36 8.25 10.83 35.63

2 6.23 7.79 9.42 14.34 48.88

3 8.25 8.86 11.38 18.46 55.63

4 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 2 3 4 Largest

Smallest (late) 6.03 7.25 8.15 10.14 36.24

2 6.89 8.17 9.52 16.22 44.18

3 8.23 10.23 11.36 21.16 56.43

4 10.13 14.36 16.28 28.56 63.36Largest (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 afterNPPAs. We double sort firms into quintiles by first using the NPPA cue and sorting firms according totheir 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 inpanel C. The reported numbers are based on means. The institutional holdings data is collected fromThomson 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

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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 institutionalholdings 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

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 2 3 4 Largest

Smallest 5.23 10.14 21.23 31.12 41.87

2 8.36 12.58 22.26 33.45 54.42

3 10.58 14.64 25.37 36.68 71.38

4 13.15 18.12 28.24 41.22 106.27

Largest 15.34 22.37 35.68 62.39 124.68

Difference (largest-smallest) 10.11* 12.23* 14.45* 31.27** 82.81***

Panel C Market value quintile

NPPA timing quintile Smallest 2 3 4 Largest

Smallest (late) 5.87 10.32 22.01 33.86 40.81

2 8.81 13.32 23.52 35.28 52.36

3 11.23 15.37 26.47 38.62 75.38

4 14.65 19.15 29.33 42.32 110.51Largest (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 marketvalue 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 theNPPA 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 NPPAtiming 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 two-tailed t test



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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 aconsideration of other variables that are believed to affect institutional ownership, based

on the following cross-sectional regressions:

HOL ¼ a0 þ a1CUE þ a2 lnðTIMEÞ þ a3 lnðMVÞ þ a4 lnðTAÞ

þ a5 lnðFAÞ þ a6ADI þ a7RDI þ a8ROA þ a9HI þ eð1Þ

NUM ¼ b0 þ b1CUE þ b2 lnðTIMEÞ þ b3 lnðMVÞ þ b4 lnðTAÞ þ b5 lnðFAÞ

þ b6ADI þ b7RDI þ b8ROA þ b9HI þ gð2Þ

where the dependent variables are the percentage of institutional holdings relative tototal 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 share-

holders 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

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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

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

Independent variables Dependent variables

HOL NUM

Constant 2.162

(2.341)

1.285

(2.082)

CUE 0.512**

(0.258)

0.551**

(0.273)

Ln(TIME) 0.611**

(0.309)

0.637**

(0.318)

Ln(MV) 0.541**

(0.267)

0.553**

(0.271)

Ln(TA) 0.428**

(0.212)

0.415**

(0.208)

Ln(FA) 0.136

(0.141)

0.109

(0.123)

ADI 0.337**

(0.165)

0.322**

(0.162)

RDI 0.435**

(0.217)

0.411**

(0.208)

ROA 0.087

(0.073)

0.073

(0.054)

HI 0.156

(0.147)

0.144

(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 includeNPPA cue (CUE) and NPPA timing (TIME). These control variables are the market value (MV), totalassets (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 tablereports each coefficient with standard errors in parentheses and the values of adjusted R2 and F statistic inthe final two rows. Each equation is highly significant, with the p value for all F statistics being\0.01



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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 investorsis 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 theirholdings 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 theirpurchases 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,

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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 sophis-

ticated 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 wellas 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 inreaction to the new products. Therefore, in order to reduce agency costs, firms

should use NPPA signals to communicate more complete information to institu-

tional 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.

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