We examine the role of CEO optimism in explaining firm performance associated with new product introductions. New product introducing firms with high levels of CEO optimism experience better announcement-period abnormal returns and long-term stock performance than introducers with moderate or low levels of CEO optimism. Changes in abnormal operating performance following new product announcements are also more favorable for firms with high-optimism CEOs than for firms with moderate-optimism or low-optimism CEOs. The results hold after controlling for other potential explanatory factors and accounting for endogeneity. The evidence highlights the importance of CEO optimism in assessing the valuation effect of corporate product strategies.

Introduction

Shareholders on average reap significantly positive abnormal stock returns when firms invest in new products (Chaney et al., 1991; Kelm et al., 1995; Chen & Ho, 1997; Chen et al., 2002; Chen et al., 2005; Chen, 2008; Chen et al., 2012). New products can create opportunities for differentiation and competitive advantage, and this can have a positive effect on firm earnings and shareholder value. The value of a new product announcement is more favorable for firms in more technologically based or high-concentration industries, for firms that make original-product or multiple-product announcements, for firms with better investment opportunities or higher R&D intensity, and for focused firms or first-moving firms in the marketplace (Chaney et al., 1991; Kelm et al., 1995; Chen & Ho, 1997; Lee et al., 2000; Chen et al., 2002; Chen, 2008). The converse is that new product introductions result in poorer value for larger firms, for firms with more free cash flow, for firms facing higher interest rates, and for firms competing in high-strategic interaction industries (Chaney et al., 1991; Kelm et al., 1995; Chen et al., 2002; Chen et al., 2012). While the studies examining the shareholder value effect of corporate product strategies are insightful, they do not consider the role of CEO optimism, where CEO optimism is defined as the tendency of CEOs to think that they are better than they really are in terms of ability, judgment, or prospects for successful outcomes (see, e.g., Heaton, 2002; Malmendier & Tate, 2005, 2008; Malmendier et al., 2011). As people tend to be more optimistic about their performance on difficult rather than easy tasks (Griffin & Tversky, 1992), optimistic CEOs may be likely to engage in risky, challenging, and promising projects (Hirshleifer et al., 2012). New product development is risky and challenging, so one would expect CEO optimism to be important for such undertakings. Optimistic CEOs of firms introducing new products do not necessarily have a negative effect on firm value. They may in fact increase firm value, because optimistic CEOs are likely to undertake risky but valuable innovations (Hirshleifer et al., 2012). We examine the role of CEO optimism in determining the performance of firms announcing new product introductions. Firm performance is measured in terms of short-term and long-term stock performance and operating performance associated with the announcements. If optimistic CEOs tend to engage in risky but promising new product investment projects, new product strategies are likely to have a more favorable economic impact for introducing firms whose CEOs have a high level of optimism.