Intra-industry Spillover Effects of Negative News and Rival Firms’ Strategic Reactions

Intra-industry Spillover Effects of Negative News and Rival Firms’ Strategic Reactions

Abstract:
Negative news about a firm may have spillover effects on the firm’s competitors. In contrast to the conventional wisdom which suggests that a firm’s competitors are likely to benefit from its negative news, this research reveals the heterogenous spillover effects across rival firms. Based on a large-scale dataset compiled from various sources, the authors (1) compare the spillover effects of different types of negative news, (2) identify the antecedents that explain the heterogeneity in the spillover effects across rival firms, and (3) examine rival firms’ strategic reactions in response to the negative news. Results indicate that upon the release of negative news about a firm, its rival firms’ abnormal stock returns vary depending on their R&D investments, marketing investments, brand value. In turn, stock market penalty leads to rivals’ strategic changes in future brand portfolio, innovation portfolio, and recruitment emphasis. The authors also identify both firm-level and industry-level moderators that mitigate or amplify these effects. Implications for managers, investors, and policymakers are discussed.

More information on Guiyang Xiong, PhD can be found here.

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