The asymmetric effect of warranty payments on firm value: The moderating role of advertising, R&D, and industry concentration

Didem Kurt, Koen Pauwels, Ahmet C. Kurt and Shuba Srinivasan

International Journal of Research in Marketing, 2021, vol. 38, issue 4, 817-837

Abstract: Changes in firms’ warranty payments are informative signals that enable investors to form timely expectations about potential changes in product quality. The authors’ survey shows that warranty payments affect potential investors’ product quality assessments and stock investment likelihood. Their quantitative analysis reveals an asymmetric stock market reaction: unanticipated increases in warranty payments (which signal quality “losses”) lower stock returns but unanticipated decreases do not affect stock returns. Two important factors moderate this relationship. First, boosting advertising spending attenuates the negative stock return effect of unanticipated increases in warranty payments. Second, unanticipated decreases in warranty payments, which signal quality “gains”, translate into higher stock returns when the industry has become less concentrated. Interestingly, changes in R&D spending do not moderate investors’ response to unanticipated increases or decreases in warranty payments. The authors advise firms to use advertising to lessen the harm from warranty payment increases and to strongly communicate warranty payment decreases in the face of intensified competition. The authors also caution that offering warranties in general does not ensure greater firm value as declining quality firms that myopically offer warranty programs experience lower firm value than those that do not provide warranties.

Keywords: Product warranty; Product quality; Marketing signals; Firm value; Marketing-finance interface (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167811621000331
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ijrema:v:38:y:2021:i:4:p:817-837

DOI: 10.1016/j.ijresmar.2021.05.002

Access Statistics for this article

International Journal of Research in Marketing is currently edited by Roland Rust

More articles in International Journal of Research in Marketing from Elsevier
Bibliographic data for series maintained by Catherine Liu ().