The impact of product innovation announcements on firm value: evidence from the bio-pharmaceutical industry

We investigate the impact of product innovation announcements on firm value using an extensive data set of bio-pharmaceutical products. We find that two main effects shape observed firm value changes: a ‘probability effect’, which depends on how investors perceive the product’s likelihood of success, and a ‘portfolio effect’ that depends on the relative importance of a product within a company’s portfolio. We estimate product-specific success probabilities using various machine learning methods. The portfolio importance is measured by product and date-specific net present values. We find that market reactions increase in the portfolio importance of the product under development and diminish in its success probability. Our results aid corporations and investors in evaluating the financial consequences of innovation-related news.