Southern Methodist University
SMU Scholar
Working Papers
Cox School of Business
1-1-1985
Measuring the Financial Impact of Strategic
Interaction: The Case of Instant Photography
Richard A. Bettis
Southern Methodist University
David Weeks
University of Texas at Dallas
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Bettis, Richard A. and Weeks, David, "Measuring the Financial Impact of Strategic Interaction: The Case of Instant Photography"
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Research and Development
Scboo1 of Business Administration
Southern Methodist University
Dallas, Te.x:aa ,7 5275
MEASURING THE FINANCIAL IMPACT OF
STRATEGIC INTERACTION: THE CASE OF INSTANT PHOTOGRAPHY
Working Paper 85-402*
by
Richard A. Bettis
and
David Weeks
Richard A. Bettis
Associate Professor of Business Policy
Edwin L. Cox School of Business
Southern Methodist University
Dallas, Texas 75275
David Weeks
Doctoral Candidate
University of Texas at Dallas
*This paper represents a draft of work in progress by the authors and
is being sent to you for information and review. Responsibility for
the contents rests solely with the authors. This working paper may
not be reproduced or distributed without the written consent of the
authors. Please address all correspondence to Richard A. Bettis.
This paper discusses the results of a study of the strategic interaction
of Polaroid and Eastman-Kodak in the area of instant photography during 19751978.
The study aims to determine how useful the event-time methodology from
financial economics is in studying complex strategic interactions by comparison with more traditional approaches.
The study builds on the conceptual ef-
forts of Porter (1980, Chapters 4,5) and the methodological innovations of
Ruback (1982).
Overall the study demonstrates that the event-time methodology
can be used to significantly improve our understanding of complex
strategic
interactions.
THE PROBLEM
Significant progress has been made during the past few years in quantifying the impact of various strategies on the profitability of the firm.
Sta-
tistical studies such as those by Schendel and Patton (1978), Galbraith and
Stiles (1983), Bettis (1981), and Woo and Cooper (1982) among others have provided a basic understanding of the relationship between strategy and performance.
These studies have shared two general characteristics.
have used an accounting return as the performance measure.
First, they
Typical of these
accounting determined performance indicators have been return on equity, return on assets, or return on invested capital.
Second, they have generally
been cross-sectional studies that related performance to a series of strategy
or strategy-related variables after correcting for other impacts on performance (e.g., size and industry).
Hence the output from these studies general-
ly can be thought of as a model of the average impact of strategy on performance across a sample of firms.
Although this general approach to empirically studying strategy has been
highly useful in gaining various insights, it has several obvious
- 2 shortcomings.
Large samples of firms are necessary.
thirty are almost non-existent.
Sample sizes below
This precludes the study of many phenomena
that are not characterized by numerous instances.
Specification errors are an
inherent risk since no general theoretical model of the relationship between
strategy and performance exists.
Modeling approaches vary among researchers.
Independent variables are often significantly correlated•
Relevant data such
as market shares are often not available or unreliable.
Furthermore, the use of accounting based returns as performance measures
introduces conceptual and measurement problems.
Normatively, according to
financial and economic theory the objective of the management of the firm
should be to maximize the market value of the firm.
Hence, at least in a nor-
mative sense it is market value and not profitability that should be the measure of strategic effectiveness.
The two are related (see for example, Beaver,
Kettler and Scholes, 1970) but the correlation is far from perfect.
The basic
difference is that market value reflects the expectation of investors relative
to the future performance of the firm (an ex ante measure) while accounting
returns are essentially retrospective measures (ex post) of achieved performance.
As a simple example of the difference consider the fact that the stock
of some high technology firms in recent years have traded in the market at
high multiples of book value while consistently losing money.
Such results
represent the expectation of investors that these firms would eventually be
very profitable (as many of them have become).
The other problem with accounting returns is the general issue of measurement.
Because of differences in revenue recognition, inventory valuation
depreciation methods and other varying accounting conventions and the use of
historical cost for valuing assets, accounting returns can be substantially
- 3 -
biased.
For an interesting discussion of many measurement problems associated
with using accounting returns see Bentson (1985).
Recently a few examples have occurred in the strategy literature that use
the event-time methodology from financial economics which is based on the market value of the firm (e.g., Montgomery, Thomas, and Kamath (1984); Montgomery
and Singh (1984)).
These studies also require samples of substantial size so
that, by definition, "unique" situations cannot be studied.
Neither the traditional approaches using accounting returns and large
samples nor the event-time methodology using market value with large samples
are currently applicable to empirically studying complex strategic interactions that involve a unique sequence of moves by competing firms.
For exam-
ple, consider a situation where competitor "A" in an industry with three participants (A, B, C) announces a new product with improved performance.
In
reaction to this competitors "B" and "C" cut prices the following week by 15%
and 25% respectively.
Three months later it becomes obvious that company
"A"'s new product is not selling because of reliability problems.
Company "A"
then announces a $20 million crash project to improve reliability to above industry averages while extending the 30 day warranty period to 1 year.
A month
later competitor "B" starts a massive advertising campaign stressing the reliability of their product relative to the competition.
Almost simultaneously
competitor "C" announces a joint venture with a Japanese firm to shift production to a massive new Japanese plant to be completed in 6-8 months and cut
prices by an additional 10%.
Three weeks later Company "A" announces that it
is suing Company "C" for patent infringement.
A situation such as this hypothetical example cannot be studied using the
traditional empirical approaches.
However as Porter (1980, Chapters 4, 5) and
others have pointed out such sequences of dynamic competitive moves are an
- 4 essential component of strategic competition in most industries.
Such, situa-
tions can be partially modeled by the methods of modern game theory and can be
studied using clinical research methods (case studies are resplendent with
such
~ituations)
but have not generally been approached empirically in the
context of relating strategy or strategic moves to performance.
Current em-
pirical studies of strategy and performance are focused at a much more macro
level.
They can investigate on the average what macro strategies (e.g., di-
versification strategy, level of vertical integration, differentiation versus
low cost, etc.) over relatively long periods of time "tend to outperform"
others, by how much, and under what conditions.
However, they cannot be used
to study the micro competitive dynamics of an industry as in the hypothetical
example above.
So, in summary, current approaches to studying the relationships between
strategy and performance are limited to large samples.
Large sample studies
have yielded numerous valuable results but few have used the normatively correct firm value as a dependent variable and none can be used to study complex
strategic interactions of the type discussed above.
While clinical research
can be used in these latter instances it is weakened by the inability to assess the financial impact of various moves.
The current study aims to deter-
mine if this situation with respect to strategic interaction can be improved
upon to the point that assessments (crude perhaps, but useful) of financial
impact can be made.
THE METHODOLOGY
The efficient-markets hypothesis (see, for example, Fama (1976)) posits
that secruity prices reflect all available information.
Therefore, unantici-
pated information, such as take-over bids, result in a change in the security
- 5 -
prices of the firm.
Theoretically, this price change is an unbiased estimate
of the present value of the change in future cash flows to the firm.
It should be noted that anticipated changes cannot be unambiguously interpreted since they involve changes in expectations over some period {the anticipation period) prior to the actual change.
Furthermore, when two or more
pieces of information are released only the combined effect can be measured.
These points will be discussed more later in the paper since the situation
studied involves some anticipated changes and multiple simultaneous disclosures.
Given an efficient capital market, any intervention that will affect future cash flows will cause a change in the firm's security prices as soon as
the change is anticipated by investors in the capital market.
This allows the
possibility of, for example, security prices changing before the actual occurrence of the market intervention if its occurrence becomes likely or obvious
or information about the possible occurrence of the intervention is "leaked"
to the security market {i.e., anticipated changes as just discussed).
In practice, the impact of an event on a firm's securities is measured by
estimating the "normal" return to the stock in the absence of the event.
The
"abnormal" return to the stock then is the difference between the actual return and the normal return.
This approach is what has generally been termed
the time-event methodology commonly used by financial economists.
It has been
used in the fields of finance and accounting to study the effects on common
stock prices of important economic events such as earnings and dividend announcements, capital structure changes, the merger announcements, and the
listing decision (see, e.g., Boness et al. (1974), Dodd (1977), Fama et al.
(1969), Masulis (1983), Petit {1972), and Wansley et al. {1983)).
- 6 -
The time-event methodology, pioneered by Fama, Fisher, Jensen and Roll
(1968), rests on an equilibrium model of an individual firm's expected rate of
return on equity. · Assuming that security returns have a multivariate normal
distribution a single factor market model consistent with the well-known
Sharpe-Lintner-Mossin capital asset pricing model (CAPM) can be formulated for
time-event studies as:
Rjt • aj + BjRmt + ejt
(1)
where:
Rjt • rate of return on security or portfolio j over period t;
Rmt
= rate
Bj
• Cov(Rjt,Rmt)/Var(Rmt>, the systematic risk of portfolio or security
of return on a value-weighted market portfolio over period t;
j;
ejt
= the
random disturbance term of the rate of return on security or
portfolio j over period t, with E(ejt)zO.
Since the disturbance term, ejtt represents the deviation of the rate of
return in period t from the expected return, it is useful as a measure of the
abnormal return.
More specifically, in applying the above model to an event,
the time surrounding the event is partitioned into two periods, an estimation
period and an analysis period.
The estimation period, which falls before the
event, is used to estimate the parameters aj and Sj as the intercept and
slope, respectively, by a regression model of firm returns against market
returns.
Given these estimates of aj and Sj, the prediction errors for each
period t within the analysis period can be calculated as:
(2)
where aj and Sj are the time series ordinary least squares estimates from the
prediction period.
Rtj is, of course, the total return, and the term in pa-
renthesis is the estimate of the normal return.
Therefore, PEjt measures the
- 7 -
abnormal performance at a given time during the analysis period due to the
event.
To measure the cumulative effect of an event upon the security's ab-
normal returns up to a specific time T within the analysis period, the
cumulative prediction error (CPE) is computed:
T
CPET -
L
k=l
(3)
PEjk
The CPE is usually taken as a proxy for abnormal performance over an interval of the analysis period.
The behavior of the CPE can be analyzed either
visually or statistically to derive inferences regarding the impact of the
event under study upon the security's returns.
A significant upward (or
downward) drift in the CPE can be taken as evidence of a positive (or negative) impact of the event in question on the excess risk-adjusted rate of return on a given security or portfolio.
In general averages are taken across a
portfolio, however, this prohibits detailed examination of the impact of an
event on a particular firm or an event that is only relevant to a particular
firm.
It should be noted that CPE will provide useful inferences only if the
security risk,
e,
analysis periods.
does not change significantly between the estimation and
If there is a significant shift in the security or port-
folio's systematic risk caused by the market intervention in question, a
"moving-beta" CPE (see, for example, Bar-Yosef and Brown 1977) can be used to
allow for the possibility that new significant information resulting from the
market intervention might have caused a shift in the systematic risks.
Ruback (1982) pioneered the use of statistical tests applied to estimates
of abnormal returns for individual firms.
Statistically, Ruback's approach
was merely to test whether the returns during the analysis period associated
with a particular event were different from the forecasted returns derived
- 8 -
from the estimation equation.
There is a well-known statistical approach to
this problem (e.g., Neter and Wasserman, 1974, PP• 71-75).
An unbiased esti-
mator of the variance of prediction error is
! + <Rmt - Am>
Var(PEjt) • MSE(1 + m (m- 1 )Var(Rm))
(4)
where:
MSE • mean squared error or the residual variance from
the market model regression;
M • number of observations used to estimate the
market model regression;
Rmt
= actual
market return on day t; and
Rm • average market return over the estimation period.
Given this variance a t-statistic is easily calculated as:
t •
I
'" Var(PEjt)
(5)
Ruback found i t necessary to take the sum of the returns on the day before and the actual event day in three of his twelve events because of early
leakage of information as denoted by large returns the day before an event
day.
AN EXAMPLE AND MODEL OF STRATEGIC INTERACTION
The example selected for study was the Polaroid and Kodak strategic interaction in instant photography during 1976 and 1977 and the surrounding time
period.
sons.
This particular competitive situation was chosen for a number of reaThere is a classic case series (Porter, 1983a; Porter and Fuller, 1978)
which describes the situation and its evolution, and has been widely taught
- 9 -
and appears in several Business Policy casebooks (e.g., Christensen, et al.,
1985).
Polaroid is a single product (instant photography) firm while Eastman Kodak is diversified around a core photography business.
This permits studying
the pure impact of the strategic interaction on the market value of a firm
since there are no other businesses but instant photography in which Polaroid
competes.
Hence, any market value change in Polaroid detected after correct-
ing for the impact of the overall market unambiguously results from developments in instant photography.
By contrast, Kodak at the start of the interac-
tion has almost no stake in instant photography but seeks to gain a substantial if not dominant position.
It should, however, be remembered that Kodak's
picture developing business was under increasing attack by the instant photography.
Hence, market value changes in Kodak detected after correcting for
the overall market cannot be unambiguously ascribed to developments in instant
photography.
This presents the opportunity to see if the event-time method-
ology can be used in the presence of significant "noise" from other businesses.
This is the general problem faced in using stock prices to study any
diversified firm.
Overall the asymmetry between Polaroid (single business)
and Eastman-Kodak (related diversifier) provides an interesting test of the
power of the methodology under varying levels of noise resulting from diversification.
A third reason for choosing this particular example was that it involved
apparent attempts by the firms to use selective disclosure of information to
impact their own and their competitor's stock price.
At certain points in the
competition facts are misrepresented and bluffing occurs.
Bettis (1983) has
suggested that such information disclosure and manipulation is an element of
strategy that has been largely ignored by the strategic management research.
- 10 A final reason for choosing instant photography in 1976 and 1977 was the
availability of an overall model from game theory, the prisoner's dilemma,
that captures some of the more important features of the specific situation
and can potentially be generalized to other situations.
This model will be
discussed in more detail below, but first a brief description of the actual
situation will be useful.
Polaroid and Kodak Battle in Instant Photography
The sequence of events studied involved the strategic interaction of
Polaroid Eastman-Kodak in the area of instant photography.
As
mentioned above
this particular strategic interaction is the subject of a well-known case series that has been used at numerous business schools to teach the basic concepts of market signaling and competitive moves (see Porter 1980, especially
chapters 4, 5).
Since a good chronology of events is available and since the
general nature of the interaction is well-known to scholars in the area of
strategic management only a brief description focussing on key events will be
discussed in the present paper.
Table 1 lists the key events of the interaction as gleaned from the case
studies.
Prior to 1976 Polaroid had faced no serious competition in instant
photography.
In 1974 Kodak for the first time revealed that it was working on
its own system of instant film and cameras.
This may have been intended to
signal to Polaroid to move more cautiously since instant photography was
starting to hurt Kodak's lucrative developing business and/or it may have been
an announcement of actual intentions.
Kodak announced the Kodak instant.
Whatever it was, in February of 1976
This occurred in the annual report which
had four full pages on the Kodak system.
Since Kodak has a December 31 year
end, the annual report probably went to press sometime in late January, 1976.
- 11 On
April 20, 1976 Kodak demonstrated two new instant cameras and film at
a press conference in the grand ballroom of the Pierre Hotel in New York City.
Walter A. Fallon, president of Kodak described the two new cameras and instant
film as offering "remarkable color quality" to the consumer.
Dr. Albert Sieg,
who led the development effort, stated that the chemistry of the new film was
"fundamentally new" (Porter, 1983a).
A week later, at Kodak's annual meeting, Fallon made numerous enthusiastic statements in response to stockholder questions about the instant system.
Later in the day at a luncheon for security analysts, Fallon dismissed the validity of a Polaroid patent suit (Porter, 1983a).
On July 21, 1976, a Kodak spokesman made enthusiastic statements about
the level of dealer orders far exceeding expectations and straining production
capacity.
At this same time rumors were circulating about Kodak experiencing
considerable problems at its production facilities (Porter and Fuller, 1978).
In August of 1976 Polaroid unveiled two new cameras but did not cut
prices to or below the Kodak levels (Porter and Fuller, 1978).
On October 19, 1976, President Fallon commented at a meeting of Securities Analysts of San Francisco:
No new product in our history has received the attention
given to the family of instant products introduced by
Kodak in April of this year • • • In all, we will have manufactured and shipped more than one million Kodak instant
cameras by the end of 1976, with the bulk of those shipments taking place between now and the end of this year.
For 1977, our production will increase by a factor of several times. A substantial body of market research tells
us these products will move quickly through the hands of
retailers to consumers. That research • • • reveals an
overwhelmingly positive response to Kodak instant products
(Fallon, 1976).
On February 17, 1977 announced several new products, but maintained
prices above comparable Kodak products.
On March 23, 1977 Kodak unveiled 17
- 12 new products.
Douglass C. Harvey, Kodak executive vice president and general
manager of the
u.s.
and Canadian Photographic Division reiterated the compa-
ny's commitment to instant photography and added that over one million Kodak
instant cameras had been sold in the
u.s.
and that reaction to them had thus
far been overwhelmingly favorable (Porter and Fuller, 1978).
On April 22, 1977, contrary to previous statements, Eastman Kodak announced via the annual report disappointing results for 1976.
Preliminary re-
sults for the first quarter of 1977 were also released and showed a 20% fall
in net earnings on a 5% rise in sales from the same quarter in 1976.
On
the
previous day Kodak announced a furlough program to reduce employment by 150 at
its instant film manufacturing facility.
Industry sources estimated that
Kodak only sold 570,000 cameras at retail by December 31, 1976 (Porter and
Fuller, 1978).
On
April 26, 1977 Eastman-Kodak and Polaroid held simultaneous annual
meetings.
Kodak made some conciliatory measures toward Polaroid.
Polaroid,
probably unaware of Kodak's conciliatory gestures, announced a large price cut
to below the prices for comparable Kodak products (Porter and Fuller, 1978).
The preceding discussion summarized in Table 1 is not intended to capture
the richness of the actual case series.
the cases.)
(Interested readers should consult
Furthermore, it is not intended to summarize all of the events
that impact equity values for the two firms.
A more thorough summary of
events that may impact firm values will be presented later as part of the
data.
The discussion is intended to acquaint or reacquaint readers with some
of the basic features of the competition in instant photography and provide a
basis for the discussion of the model that follows.
- 13 Modeling the Battle
As Porter (1983a) has pointed out the competition in instant photography
is an example of the classic Prisoners' Dilemma from game theory.
and Raiffa, 1957; Rapoport and Chammah, 1965.)
(See Luce
The term "Prisoner's Dilemma"
comes from the anecdote that is usually used to illustrate this game.
prisoners are held incommunicado and charged with the same crime.
the option of squealing on the other or maintaining silence.
maintain silence, they both go free.
Two
Each has
If they both
If they both squeal, they both are
punished (the anecdote usually specifies hanging).
If one prisoner talks
and the other does not, the squealer not only gets off scot-free but also
collects a handsome reward.
The prisoner who holds out is convicted on the
strength of the other's testimony and is punished.
It is obviously in the
interest of each to squeal no matter what the other does, but it is in their
collective interest to hold out.
As Rapoport and Chammah (1965) have shown
there is no easy or satisfactory solution to the paradox of this game.
The
natural and logical individual incentives are for each to squeal and betray
their collective interest.
Drawing on Porter's (1983b) analysis Figure 1 allows us to place this
game in the context of the Polaroid-Kodak situation.
As this exhibit shows
each firm can either choose to "fight" or seek "detente".
fight the payoffs are very low for both.
payoffs are moderate for both.
If both choose to
If both choose to seek ··detente" the
The "fight/detente" situations are inherently
unstable and unlikely to be no more than a short-term situation before evolving into ••detente/detente•• or, more likely "fight/fight".
The situation is
further complicated by the necessity to hide, signal or bluff intentions
through various competitive moves to the competitor.
intended moves of ' the competitor is a constant hazard.
Misinterpretation of the
Furthermore, there are
- 14 -
questions of how much commitment lies behind each move and how to communicate
that commitment.
Furthermore, more along the lines of classic economic theory the entry of
Kodak into instant photography represents the destruction of the virtual
monopoly that Polaroid held in instant photography and its replacement by a
duopoly.
Following directly from classical economic theory, this reduction
in Polaroid's monopoly power should lower the returns to below the level that
a monopolistic market structure can support.
(This formulation of the situa-
tion and the prisoner's dilemma formulation discussed above are largely equivalent in their implications.)
Both formulations of the Polaroid-Kodak competitive situation, the prisoner's dilemma and the destruction of a monopoly, raise interesting exploratory issues for the present research.
Both suggest that the equilibrium re-
turns on equity that Polaroid will earn in the new (duopolistic) market structure will be significantly less than Polaroid earned under the old (monopolistic) market structure.
(It should be noted that this does not necessarily
need to be true during the transition between equilibria.
during this period may stimulate primary demand.)
tion will ultimately reduce profits.
Increased rivalry
In simple terms, competi-
Since market returns represent the esti-
mate of the market for the present value of the future economic earnings of
the firm, inevitably the value of Polaroid must fall to reflect the new equilibrium market structure.
An interesting exploratory issue is when the market
recognizes this and corrects the value of Polaroid downward.
In other words
when does the market recognize the inevitability of a new market structure.
This recognition by the market is complicated by the incentives to release
false or misleading information in an intense competitive situation.
Further-
more, the question arises of when the market judges Kodak's entry to be
- 15 -
An unsuccessful entry by Kodak would not only restore Polaroid's
successful.
monopoly situation, but likely discourage other likely entrants that lack
Kodak's enormous resources.
DATA, ANALYSIS, AND RESULTS
The time-event methodology was used with daily return data.
Daily data
for Polaroid, Kodak, and a value-weighted market index were obtained from the
In a sense these values constituted the !!! dependent variables.
CRSP tapes.
Correspondingly, events such as those listed in Table 1 constituted the independent variables that caused the abnormal returns for Polaroid and Kodak.
However, it would be dangerous to believe that a set of events gleaned from a
set of teaching cases was close to complete or sufficient in terms in information that impacted firm values through the equity markets.
Hence a more
thorough list was needed of information that might impact market value.
For
this reason the Wall Street Journal Index was selected as a source of more
complete information.
All entries during 1976 and 1977 were studied and those
that appeared to have any reasonable potential to impact market valuation for
either company were recorded.
photography.)
(This included events unrelated to instant
These events appear chronologically in Table 2.
Whenever there
was some doubt about whether the event should be included the decision was to
include it.
Given the data from the CRSP tapes, regressions were run to estimate the
parameters of the single-factor market model in Equation 1 for both Polaroid
and Eastman-Kodak using daily data for 1975.
The results appear in Table 3.
It should be noted that the regression for Polaroid explains only 22% of the
variance.
However, for both firms the coefficient
~
is statistically signif-
icant, which indicates that the firms returns are related to market returns.
- 16 Overall, the results are typical of those reported in the finance literature
(e.g., Marsules, 1983).
The use of the equations in Table 3 to calculate abnormal returns for
1976 and 1977 will provide useful results only i f the B's did not change between 1975 and the following years.
To check this regressions were also run
for 1976 and 1977 (and other years) as summarized in Table 4.
The so-called
"Chow Test" (see Fisher, 1970, for a formal derivation) was run.
The results
failed to detect any significant difference between 1975 and either 1976 or
1977 for either firm.
The regressions summarized in Table 3 were then used to calculate the cumulative prediction errors for the analysis period, as an estimate of the cumulative abnormal returns as specified by equations (2) and (3).
The result-
ing estimates of the cumulative abnormal returns are shown plotted against
time in Figure 2.
Specifically on the time scale observation 1 denotes the
first trading day of 1976, observation 2 the second trading day of 1976 and so
forth.
Figure 2 is intended for visual inspection and interpretation.
The plots of the estimated cumulative abnormal returns shown in Figure 2
display some interesting patterns.
Shortly after the first of the year (1976)
Polaroid seems to recognize a positive abnormal return of 8-10% while Kodak
dropped by 10-14%.
The total difference of roughly 20% narrows as the antici-
pated unveiling of Kodak's instant camera approaches in April 1976.
In early
April Kodak's abnormal return has improved slightly to a negative 8% while
Polaroid has decayed from a +10% abnormal return in early March to a negative
return of over 12% by April 20 (observation 76).
On April 20 Kodak unveiled
its instant picture cameras and disclosed its strategy for challenging Polaroid.
From this "declaration of war" to roughly the middle of May, 1977 (May
11, 1977 corresponds to observation 344) or for approximately 13 1/2 months
- 17 Kodak displays a surprisingly uniform slide as the war rages ending up with a
cumulative negative abnormal return of over 76% on May 11t 1977.
at roughly this level throughout the rest of 1977.
Kodak stayed
Meanwhilet Polaroid's for-
tunes rise from a negative cumulative return of over 12% on April 20t 1976 to
a positive figure of over 23% on October 7t 1976 (observation 195).
Within
just a few days Polaroid fell to about a 10% cumulative abnormal return.
This
fall corresponded to an optomistic session Fallon (Kodak CEO) had with security analysts and anticipation of "flat" third quarter profits for Polaroid (see
events 22 and 23 in Table 2).
After this decline Polaroid appears to maintain
approximately a positive 10%-12% cumulative abnormal return with some moderate
fluctuations in each direction.
In sum the plots of Figure 2 seem to be clearly indicating that beginning
in April of 1976 Kodak increasingly was losing the war with Polaroid in the
judgement of the market.
It appears that the market is suggesting that Kodak
is getting deeper and deeper into a competition with Polaroid that it cannot
win.
To complement the visual analysis of Figure 2 a series of statistical
tests were also run.
Using the test for significance discussed previously a
two-tailed test at the 10% level was run on all of the daily returns in the
analysis period.
Following Ruback (1982) the authors decided to associate
with each event the returns on the day it appeared in The Wall Street Journal
and the returns on the two previous days.
This was done since often informa-
tion appeared in The Wall Street Journal the day after the actual event (e.g.t
the results of a management meeting with security analysts) and leakage could
have easily occurred the day before that.
that were found to be significant.
Table 5 lists all of the returns
Table 6 lists the abnormal returns associ-
ated with each event from table 1 using the 3-day window discussed above.
- 18 The returns on a total of 73 days were found to be significant.
Of these
73 significant returns, 34 returns or 46.6% could be associated with a particular event using the three day window methodology discussed earlier.
Table 6
lists the actual significant returns for each three day window associated with
each event from table 2.
The significant returns were cumulated for each
three day period and the cumulative listed in table 2 for each firm and event.
Out of the 52 events a total of 34 or 65.4% could be associated with significant abnormal returns.
At the end of the two year analysis period Polaroid
had an estimated cumulative abnormal return of +10.7% while Kodak stood at
-82.6%.
The cumulative figures for the significant returns listed in Table 5
were -2.6% and -34.2% respectively.
Furthermore, the cumulative figures for
the significant returns associated with an event in Table 2 were -8.8% and
-50.8% respectively.
Discussion
The estimated cumulative abnormal returns in Figure 2 and the statistical
tests in Tables 2, 5, 6 demonstrate that it is possible to use financial returns to partially assess the impact of strategic interaction in general and
of specific stratigic moves in particular.
However, the picture the meth-
odology paints of the interaction is valuable but incomplete.
Of the 73 sta-
tistically significant daily returns in Table 5, about 54% could not be associated with a particular event.
Furthermore, of 52 key events in Table 2,
about 35% could not be associated with any significant returns.
In addition
some of the events fell close together in time and hence returns could not be
unambiguously assigned a particular event in some cases.
This lack of a one-to-one mapping of key events to .significant abnormal
returns raises several methodological issues.
First, it is unlikely that
- 19 -
abnormal returns associated with key events that fall on the same or closely
adjacent days can be unambiguously separated.
Second, for some of those re-
turns (Table 5) that could not be associated with an event, it is likely that
a more thorough search of archival sources (e.g., local newspapers at plant
locations) would have uncovered some events that were not documented in The
Wall Street Journal.
However, it is also likely that some of the significant
returns were movements in anticipation of future events and not responses to
undocumented events.
(In this regard the plots in Figure 2 give more of an
overall view of the unfolding of excess returns associated with the general
competition rather than tied to a specific chain of events.)
Furthermore
movements in anticipation of events before they occur no doubt result in some
events in Table 2 not being associated with excess returns since the returns
may have occurred in anticipation weeks or months earlier.
Also, the move-
ments actually associated with an event may be correcting the anticipations
rather than responding to the actural event.
The overall problem with anticipated returns is perhaps the thorniest issue raised by using the time-event methodology to model complex strategic interactions.
It corresponds roughly to problems of specification and multi-
collinearity encountered in using more traditional large sample approaches to
the quantitiative study of strategy.
In both cases it is incumbent on the re-
searcher to be aware of the problem and make what adjustments may be called
for in the interpretation of the results.
It should also be noted that many
events cannot be anticipated (e.g., surprise announcements) and hence can be
fully modeled with the methodology used in the present paper.
Given an aware-
ness of the general nature of the "anticipated returns" problem with the modeling of financial returns we now turn to a discussion of some of the substance of the results as it relates to Eastman-Kodak and Polaroid.
- 20 The estimated 3-day cumulative abnormal returns (CAR's) associated with
key events in Table 2 provide several interesting insights.
The actual start of direct competition was signaled by event 9 on April
21, 1976 when Kodak unveiled its instant picture camera and disclosed its
strategy for challenging Polaroid.
Interestingly Polaroid recognized a
positive CAR of 11.3% while Kodak had a negative CAR of 3.4%.
strategy obviously did not live up to expectations.
The camera and
One can speculate that
this could have been an early signal of problems to Kodak.
Similarly, when
Kodak introduced another instant camera (event 34) about one year later it
ceived a CAR of -1.9%.
re~
By contrast, when Polaroid "strongly hinted" that it
would soon demonstrate its long awaited motion picture system it recognized a
+5. 3% CAR.
In addition to these competitive moves in the product market, the battle
was waged in a series of legal moves.
Events 11, 13, 14, 16, 17, 19, 27, 30,
35 and 41 all involve legal moves (primarily patents).
associated with six of these ten legal events.
Excess returns were
Similarly, other competitive
moves (e.g., events 12 and 33) resulted in abnormal returns.
Perhaps one of the most interesting aspects of the interaction involves
the apparent use of information disclosure and in some cases possible misrepresentation as a weapon.
For example, earlier in (page 10) the current paper
the President of Kodak is quoted from an address to security analysts in which
he disclosed an "overwhelming positive response to Kodak instant products" and
forecast sales of over 1 million units by end of the year which was about 21/2 .months away.
This event which is noted as event 22 in Table 2 apparently
caused a negative 5.6 CAR in Polaroid's stock.
Hence, the Kodak CEO was able
to inflict substantial damage on Polaroid by simply making a very positive
statement about Kodak's instant camera business.
Furthermore, the statement
- 21 -
turned out to be incorrect.
Kodak had a disastrous fourth quarter and sold
only 570,000 cameras by year end.
senting or bluffing.
It would appear that Fallon was misrepre-
At any rate on April 25, 1977 (event 40) Kodak released
financial information for 1976 and the first quarter of 1977 that showed how
wrong Fallon had been.
This event caused a 7.9% negative CAR for KOdak.
Another interesting aspect of the competition disclosed by Table 2 is the
impact of security analysts.
Consider event 10 as an example where analysts
are quoted as viewing Kodak entry into instant photography positively.
This
event was associated with a one day negative CAR of 5.3% for Polaroid.
The immediately preceding examples illustrate how useful the statistical
test methodology can be for gaining insight into various competitive moves in
the interaction.
2.)
(The interested reader should examine all 52 events in Table
In particular it would appear to be a useful assessment tool that firms
could use to determine the impact of various competitive moves.
By contrast with the detailed microscopic look at individual events that
the statistical tests provide the graphs of Figure 2 provide a more general
view of the overall evolving impact of the competition.
In particular the
graphical analysis should be useful in studying the essence of the evolving
situation as a prisoner's dilemma game or as the change of structure from monopoly to duopoly as discussed earlier.
Following from the earlier discussion
these graphs would be expected to capture the declining profit potential of
Polaroid as its monopoly position is eroded.
most definitely do not capture this.
tive CAR of about 10%.
The graph of Polaroid's CAR's
In fact Polaroid ends 1977 with a posi-
By contrast it is striking how consistently Kodak de-
clines from April 1976 till about May of 1977 when the CAR's are greater than
-70%.
This pattern in both stocks is unexpected based on the previously dis-
cussed models of the situation.
- 22 Why isn't Polaroid experiencing negative CAR's and why is Kodak?
No sin-
gle definitive answer can be advanced, but two plausible explanations can be
obtained by examining Tables 7 and 8.
Table 7 shows the return on equity for
both firms from 1974 through 1983, while Table 8 shows the closing equity
prices and percentage changes for both firms and the S&P 500 index.
As Table
7 shows Polaroid's ROE is rebounding from low levels during 1974, while
Kodak's ROE is on the decline during 1976 and 1977.
This suggests that the
patterns of Figure 2 merely reflect changes in current earnings.
This is a
bothersome explanation for Polaroid though since Polaroid's average yearly
earnings for 1979 through 1983 drop to less than one-half of their average
1976-1977 earnings.
This drop probably reflects the destruction of Polaroid's
monopoly position in instant photography.
The question, though, still remains
as to why Polaroid's excess returns do not reflect this during 1976 and 1977.
Examination of Table 8 provides a tentative explanation.
This table suggests
that Polaroid suffered substantial negative excess returns during 1974 and
1975.
These were probably in anticipation of Kodak's entry into instant pho-
tography.
The 1976 and 1977 positive returns can then be seen as a correction
of earlier anticipations which were overly pessimistic about the competitive
outcome.
The pattern of returns for Kodak are also bothersome.
Here the diversi-
fied nature of the firm undoubtedly plays a role along with earlier anticipations of the market.
Conclusion
This paper has demonstrated the usefulness and limitations of the timeevent approach in studying complex strategic interaction.
The methodology for
- 23 -
identifying key events and associating abnormal returns provided useful insights.
When coupled with the case material it provided an interesting analy-
sis of the individual moves in the competitive interaction.
The plots of the
cumulative abnormal returns provided an interesting overview of the financial
impact of the competition.
Plots such as these could provide corporate
managers with insight into evolving competitive situations if updated on a
regular (e.g., weekly) basis.
Some significant limitations were encountered with the methodology.
First, The Wall Street Journal index appeared to be an incomplete source of
potential key events.
this.
A more thorough search of primary sources could rectify
Second, the diversified nature of Kodak introduced some "noise" into
the analysis.
However, as Table 2 documents it was still possible to associ-
ate abnormal returns with Kodak's instant photography business in many cases.
Finally, the general problems associated with market anticipation of future
events introduced significant problems.
These could have been partially over-
come by using a longer window than two years.
A window from 1970 to 1977 pos-
sibly could have captured much of the anticipated returns.
Overall the methodology seems to offer substantial promise.
It can be
used to examine unique strategic interactions where large samples are, by
definition, not available.
Furthermore, it adds quantitative rigor and
insight to the qualitative considerations inherent in case studies.
In
combination with such studies it would seem to be particularly useful.
- 24 References
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Y. and A. c. Cooper, "The Surprising Case for Low Market Share,"
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c.
Figure 1
Prisoners' Dilemma for Polaroid and Kodak
Kodak Options:
Go aggressively for a large share.
1)
Fight.
2)
Detente.
Accept a modest share.
Polaroid Options:
Aggressively protect its dominance.
1)
Fight.
2)
Detente.
Yield a substantial share.
Payoff Matrix
Polaroid
Detente
Fight
Fight
LOW PROFITS
FOR ALL
UNSTABLE
Kodak
MODERATE PROFITS
Detente
UNSTABLE
FOR ALL
%Cumulative
-esiduals
0.3
0.2
0.1
0.01
-0.1
-0.2
-0.3
-0.5
-0.6
-0.7
-0.8
-
l 1 .... 'A
"
Figure 2
V
'<
ESTIMATED CUMULATIVE ABNORMAL RETURN
CARP
1
-
1\
~
A
·
:J
~~-''=",;::::/;:::-
~ 'v"'\..--"'
~~~~~
CARK
21
41
Observation
61
81
101
-0.91~------;;------!;-::-:-----7;------L----_j
1
0.3
I
CARP
CARK
122
142
Observation
162
I
182
I
202
I
-
~
~
~
~~-,.~~
-.,.
""--
102
Residuals
% Cumulative
0.3
0.2
"
203
Figure 2 (Cont.)
ESTIMA TED CUMULATIVE ABNORMAL RETURN
CARP
CARK
243
Observation
263
283
303
~~~~r"""~""N~~
~
223
Residuals
% Cumulative
0.3
0.0
-0.1
CARP
Figure 2 (Cont.)
ESTIMATED CUMULATIVE ABNORMAL RETURN
324
344
Observation
364
384
404
CARK~~
~
304
ResiCiuals
% Cumulative
0.3
0.2
0.1
0.0
-0.1
-0.2
-0.3
-0.4
-0.5
-0.6
-0.7
-0.8
-0.9
405
Figure 2 (Cont.)
,_
Observation
.,_/~~
445
465
485
.....
505
- ...................
.,r"..,~
~·'""'/A.
ESTIMATED CUMULATIVE ABNORMAL RETURN
CARP
-CARK
~~"'=
425
Table 1
Important "Events" in Polaroid-Kodak Interaction
Drawn from the Published Case Studies
A.
April 20, 1976
Kodak demonstrates instant camera and announces
plans.
B.
April 27, 1976
Kodak annual meeting.
Many enthusiastic statements
from Kodak executives.
c.
July 21, 1976
Kodak spokesman says level of dealer orders far
exceeds expectations.
D.
August 1976
Polaroid unveils two new cameras, but does not cut
prices to or below Kodak prices.
E.
October 19, 1976
Chairman of Kodak makes enthusiastic statement
about results to date.
F.
February 17, 1977
Polaroid announces several new products, but still
maintains price umbrella over Kodak.
G.
March 23, 1977
Kodak unveils 17 new products.
H.
April 22, 1977
Kodak announces disastrous results for 1976
contrary to previous statements.
I.
April 26, 1977
Kodak and Polaroid hold simultaneous annual meeting.
Kodak makes conciliatory gestures.
Polaroid
not knowing this announces large price cut to below
Kodak prices.
Table 2
Key Events From Wall Street Journal Index
1976-1977
3-day CAR's
Polaroid
Kodak
1)
1-14-76
Profit for 1975 probably about doubled from
$28.4 million, or 86 cents a share, earned in
1974; sales hit high. (Polaroid)
2)
2-13-76
Earned $614 million in 1975, down about 3% from
$630 million the prior year; net in fourth quarter dropped to $204 million, or $1.26 a share
from $220 million, or $1.36 a share. (Kodak)
3)
2-20-76
Fourth quarter profit jumped 166% to $24.7
million, or 76 cents a share, compared with
$9.3 million, or 28 cents a share, a year
before. (Polaroid)
4)
3-9-76
Introduced Tele-Instamatic camera with new
features. (Kodak)
5)
3-17-76
Imminent introduction of instant camera, recent
successful debut of office copier among factors
that should make 1976 a good year for firm,
Walter Fallon, president, said. (Kodak)
6)
3-24-76
Heard on the Street: Firm's report titillates
analysts with photo from new instant camera;
stock price leans. (Kodak)
7)
4-13-76
To unveil its instant cameras and film for selfdeveloping color prints. (Kodak)
8)
4-16-76
Polaroid Corp. seen wary, worried as it girds
for Kodak arrival in instant-photo field.
(Polaroid)
9)
4-21-76
Unveiled its instant-picture cameras and disclosed its strategy for challenging monopoly
Polaroid Corp. has held for 28 years. (Kodak)
+11.3
-3.4
10)
4-22-76
Heard on the Street: Bid by Kodak for share
of Polaroid's market gains respect as analysts
focus on entry. (Polaroid)
-8.7
+6.0
11)
4-28-76
Polaroid Corp. filed suit against Eastman
Kodak Co. alleging infringement of 10
Polaroid patents by Kodak's new instant
camera and films. (Polaroid)
-2.1
-5.5
-1.6
Table 2
(continued)
Key Events From Wall Street Journal Index
1976-1977
3-day CAR's
Kodak
Polaroid
12)
5-17-76
Polaroid may allow other companies to make
cameras using its instant SX-70 film. (Polaroid)
13)
5-19-76
Kodak claimed Polaroid's patents on instantphoto products are invalid and unenforceable.
(Polaroid)
14)
6-18-76
Filed suit in London against Eastman Kodak Co.
and Kodak Ltd., alleging infringement of 10
Polaroid patents. (Polaroid)
-5.0
15)
7-23-76
Heard on the Street: Eastman Kodak Firm's 1976
profit estimates being pared due to disappointment with second quarter gain. (Polaroid)
-3.4
Heard on the Street: British judge holding hearings of bid by company for injunction against
production or sale by Kodak in U.K. of new instant
camera, pending patent-infringement suit. (Polaroid)
-1.9
16)
17)
8-9-76
British court granted temporary injunction to company's British unit against British unit of Eastman
Kodak Co. making and selling in Britain its 'instant
picture' cameras and films. (Polaroid)
-1.9
18)
9-10-76
Heard on the Street: Japan's Fuji Photo Film Co.
beats Eastman with color film that doesn't need
flash in most situations. (Kodak)
-2.2
19)
9-28-,76
Polaroid sued Eastman Kodak Co., its Canadian subsidiary for infringing 10 Canadian patents protecting Polaroid's instant cameras, film. (Polaroid)
-2.3
20)
9-30-76
Fuji Photo-Film Co. developed camera with film for
instant photography that it asserted can compete
with Polaroid and Kodak. (Polaroid)
-2.3
21)
10-7-76
Polaroid Corp. wins in U.K. court arose from technicalities; interim ban of firm's instant products
wasn't based on substance, judge explained.
(Polaroid)
22)
10-20-76
Kodak expects good Christmas business, Walter A.
Fallon, presid ent , told securities analysts.
(Kodak)
-5.6
Table 2 (continued)
Key Events From Wall Street Journal Index
1976-1977
3-day CAR's
Kodak
Polaroid
-5.6
23)
10-21-76
Heard on the Street: Polaroid's flat third
quarter operating profit cast doubt on basis .for
many estimates. (Polaroid)
24)
10-28-76
Heard on the Street: Competition of instant camera
market dominated by Polaroid Oorp. apparently heating up as Eastman Kodak Corp.'s ability to supply
its new cameras to dealers increases. (Polaroid)
o.o
25)
11-5-76
Polaroid received boost in its instant-picture war
with Eastman Kodak when Consumer Research magazine
found "fading" problem with Kodak's instant color
film. (Polaroid)
-2.8
2 6)
11 -1 0-7 6
Kodak told retailers "fading" not significant problem with company's new instant camera color photographs. (Kodak)
+3. 9
27)
11-11-76
British appeals court overturned lower court order
restraining firm from introducing its instant film,
cameras into U.K. (Kodak)
+1.6
28)
11-23-76
Mutual funds made clear-cut choice in PolaroidEastman Kodak battle during third quarter. (Kodak)
-1.8
29)
12-10-76
Eastman Kodak and Xerox announced exchange of worldwide patent licenses covering copiers, copier supplies, and photosensitive elements used in machines.
(Kodak)
30)
12-21-76
Polaroid losts its British court battle for temporary order to block sale of instant cameras by
Eastman Kodak in Britain. (Polaroid)
31)
2-18-77
Net for
$2.43 a
million
instant
32)
2-22-77
Polaroid strongly hinted it will demonstrate its
long waited motion picture system at its April 26
meeting. (Polaroid)
33)
3-15-77
Sears, Roebuck & Oo. began selling private label
instant cameras made by Polaroid. (Polaroid)
1976 climb 27% to record $79.7 million or
share; fourth quarter net rose 29% to $31.9
or .98 a share, also a record; unveiled seven
cameras. (Polaroid)
+5.3
+5.3
+3.3
-2.2
Table 2 (continued)
Key Events From Wall Street Journal Index
1976-1977
3-day CAR's
Polaroid
Kodak
34)
3-24-77
Kodak announced new low-priced instant camera,
a high speed color-print film, 15 other amateur
photographic products. (Kodak)
-1.9
35)
3-31-77
Kodak received civil investigative demand for documents from Justice Department in connection with
investigation into firm's photographic business.
(Kodak)
-2.8
36)
4-8-77
Plans to lay off 380 employees in its Rochester
facilities division. (Kodak)
37)
4-11-77
Will introduce a motor-driven camera for SX-70
instant color pictures in June with suggested
list price of about $40. (Polaroid)
38)
4-21-77
Earnings in first quarter rose 33% from year
earlier, with per share net setting record for
period; sales gained 5%. (Polaroid)
-6.0
39)
4-22-77
To reduce its instant film work force by 150
employees through rotating furlough plan beginning April 25. (Kodak)
-3.5
40)
4-25-77
Reported 20% decline in first quarter net on 5%
sales increase from year earlier; net for 12 weeks
ended March 20 totaled $94.2 million, or 58 cents
a share. (Kodak)
-7.9
41)
4-27-77
Polaroid and Kodak held exploratory talks about possible settlement of their patent disputes, Walter A.
Fallon, Kodak Chairman, told annual meeting. (Kodak)
42)
5,-10-77
Kodak offers dealer, consumer rebates to spur sales
of its instant-photographic products. (Kodak)
43)
5-12-77
Heard on the Street: Kodak sparks investors jitters
as price nears critical low and battle with Polaroid
blazes. (Kodak)
44)
7-14-77
Changing Pictures: Firm, no longer the undisputed
king, faces antitrust trial and other problems.
(Kodak)
-2.5
Table 2
(continued)
Key Events From Wall Street Journal Index
1976-1977
3-day CAR's
Polaroid
Kodak
45)
7-19-77
Chief counsel of Berkey Photo, Inc., outlined
Berkey Photo's case in opening statement as jury
trial of its $300 million antitrust lawsuit against
firm begain in federal court. (Kodak)
-1.9
46)
7-21-77
Second quarter net rose 11% to record $20.5 million
or 62 cents a share; first half net climbed 19% to
record $34.5 million or $1.05 a share. (Polaroid)
-2.8
47)
7-27-77
Raised dividend 60% to 20 cents a share from 12 1/2
cents payable September 24 to stock of record
September 1. (Polaroid)
48)
8-3-77
Heard on the Street: Polaroid's record results fail
to quell doubts of analysts as some shade estimates
for 1977. (Polaroid)
49)
8-3-77
Eastman Kodak, following lead of Xerox Corp., announced new rental, leasing plans in U.S. for its
plain-paper copier-duplicators that it said would
benefit customers who make many copies, use at least
four machines, sign up for longer leases. (Kodak)
50)
9-2-77
Adding four pictures to its standard 20-exposure
roll of 35 millimeter color print film, a 20% increase on the roll, and increasing price of film
by 10%. (Kodak)
51 )
10-2 1-77
Third period growth in film sales exceeded espectations, Colby H. Chandler, president, told securities analysts. (Kodak)
52)
11-23-77
To give two-week leaves to 1,3000 construction
workers in Rochester, N.Y., over a five month
period because it's putting off some "non-critical"
construction projects. (Kodak)
-5.3
-5.2
+1.8
Table 3
Market !t:>del Regression Coefficients for
Polaroid and Kodak
(estimated using daily data for 1975)
...
R2
Durbin-Watson
Firm
Bj
aj
(t-statistic in parenthesis)
Polaroid
0.0007
(0.3525)
1.755
(8. 4003)
.22
1. 9699
Kodak
0.0006
(0.9169)
1.466
(20.3529)
.62
1.9143
Table 4
Market Model Regression Parameters for
Polaroid and Kodak
Kodak
Year
Polaroid
,.
R2
B.
--!::.,l-
_l,j_
R2
1974
1.35
.58
1.81
.26
1975
1.47
• 62
1.76
.22
1976
1. 41
.so
1. 82
.26
1977
1.73
.38
1.89
• 31
1978
1.86
.56
2.40
.53
1979
1.30
.47
1.83
.24
1980
.98
• 31
1.13
.20
1981
1.09
.43
1.28
.19
Table 5
Daily Abnormal Returns Significant
At 10% Level
Observation
Polaroid
12*
15*
31*
32
58*
67*
73*
76
78
87*
117
118
121*
138
140
142
151
174
177*
178*
188
200*
203
208
209
211*
215
216
218
226
229*
242*
267*
270*
277*
2 78*
280*
281 *
283*
288
289
292*
-.056
.072
.063
+.113
-.053
Kodak
-.021
-.017
-.022
-.016
-.034
-.025
-.029
-.021
+.023
-.017
-.018
-.016
-.019
-.022
-.023
-.018
-.023
+.017
-.056
-.020
+.020
+.021
-.028
+.023
+.016
-.018
+.018
-.057
-.025
+.029
-.020
-.052
+.017
+.027
-.019
+.053
+.033
+.026
Table 5 (continued)
Daily Abnormal Returns Significant
At 10% Level (cont.)
Observation
302
307*
311
312*
315
329
330
332
344
348*
356*
358*
361*
362*
390
391
392
409*
414*
415*
426*
438*
455
456
457
459*
465*
471*
478
484*
489*
Polaroid
Kodak
-.022
-.024
-.019
+.016
-.028
-.025
-.035
-.044
-.025
+.027
-.036
+.016
-.017
+.020
-.019
+.018
+.029
+.043
+.019
-.019
-.017
+.022
-.053
-.023
-.029
+.031
-.022
+.026
+.018
+.018
+.018
*These significant abnormal returns were not associated with a
particular event using the methodology of this paper.
Table 6
Significant Daily Abnormal Returns That Can Be
Associated With an Event From Table
Event
I*
2*
3*
4*
5*
6
7*
8
9**
IO**
11*
12*
13*
14
15
16**
17**
18
19**
20**
21*
22**
23**
24
25
26
27
28
29*
30*
31
32
33
34
35
36*
37*
38**
39**
4o**
41*
42*
43
44*
Observation
t-2
Polaroid
t-1
9
32
35
47
53
57
t
t-2
Kodak
t-1
t
-2.1
-5.5
72
-.016
75
78
82
95
97
118
142
152
153
176
188
190
195
204
205
210
215
218
219
227
239
246
288
289
304
311
316
322
322
330
331
332
334
343
345
388
-.034
+.113
77
-.053
+.113
-.034
-.029
-.018
-.021
-.016
-.019
-.019
-.022
-.023
-.023
-.056
-.056
-.020
+.020
-.028
+.016
+. 023
+.016
-.018
+.053
+.053
+.033
-.022
-.019
-.028
-.025
-.035
-.035
-.044
-.035
-.025
Table 6 (continued)
Significant Daily Abnormal Returns That Can Be
Associated With an Event From Table
Event
45**
46**
47*
48*
49*
so*
51
52
Observation
390
392
396
401
401
423
457
480
t-2
Polaroid
t-1
t
t-2
Kodak
t-1
t
-.019
+.018
-.019
+.029
-.023
-.029
-.053
+.018
*These events could not be associated with any particular abnormal returns
using the methodology of this paper.
**Adjacent events with two asterisks on each indicate that the events
overlapped using the methodology of the paper. In other words, the 3-day
windows overlapped. This occurred for 13 out of 34 events that were
associated with abnormal returns.
Table 7
Return on Equity
Year
Eastman Kodak
1974
18.4%
4.5%
1975
16.6
9.1
1976
16.2
10.6
1977
14.9
11.2
1978
18.6
12.9
1979
18.6
3.9
1980
19.1
8.8
1981
18.3
3.3
1982
15.4
2.6
1983
7.5
5.4
Source:
Value Line Investment Survey
Polaroid.
Table 8
Closing Prices and Percent Changes
Year
Standard & Poors
500 Index
Price
% Change
Polaroid
Eastman-Kodak
Price
% Change
Price
% Change
1970
92.15
1971
102.09
+10.8
94.25
+25.0
1972
111.58
+ 9.3
148.375
+57.4
126.125
+41. 7
1973
107.43
- 3.7
116
-21.8
69.875
-44.6
1974
68.56
-36.2
62.875
-45.8
18.625
-73.3
1975
90.19
+56.1
106.125
+68.8
31
+66.4
1976
107.46
+19.1
86
-19.0
38.875
+25.4
1977
95.10
-11.5
51.125
-40.5
26.125
-32.8
1978
96.11
+ 1.1
58.625
+14.7
51.75
+98.1
1979
107.94
+12.3
48.125
-17.9
28
-45.9
1980
135.76
+25.8
69.75
+44.9
25
-10.7
1981
122.55
- 9.7
71. 125
+ 2.0
20.5
-18.0
1982
140.64
+14.8
86
+20.9
25.25
+23.2
1983
164.93
+17.3
76.125
-11.5
33.5
+32.7
75.375
77
89
+15.6
The following papers are currently available in the Edwin L. Cox School of
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84-105
"The Optimality of Multiple Investment Managers:
by Christopher B. Barry and Laura T. Starks
84-200
"Microcomputers in Loan Management," by Chun H. Lam and George H. Hempel
84-201
"Use of Financial Planning Languages for the Optimization of Generated
Networks for Equipment Replacement," by Jay E. Aronson and Julius S.
Aronofsky
84-300
"Real Estate Investment Funds: Performance and Portfolio Considerations,"
by W. B. Brueggeman, A. H. Chen, and T. G. Thibodeau
84-301
"A New Wrinkle in Corporate Finance: Leveraged Preferred Financing,"
by Andrew H. Chen and John W. Kensinger
84-400
"Reaching the Changing Woman Consumer: An Experiment in Advertising,"
by Thomas E. Barry, Mary C. Gilly and Lindley E. Doran
84-401
"Forecasting, Reporting, and Coping with Systematic Risk," by Marion G.
Sobol and Gail E. Farrelly
84-402
"Managerial Incentives in Portfolio Management: A New Motive for the Use
of Multiple Managers," by Christopher B. Barry and Laura T. Starks
84-600
"Understanding Synergy: A Conceptual and Empirical Research Proposal,"
by William R. Bigler, Jr.
84-601
"Managing for Uniqueness:
R. Bigler, Jr.
84-602
"Firm Performance Measurement Using Trend, Cyclical, and Stochastic
Components," by Richard A. Bettis and Vijay Mahajan
84-603
"Small Business Bank Lending: Both Sides are Winners," by Neil C.
Churchill and Virginia L. Lewis
84-700
"Assessing the Impact of Market Interventions on Firm's Performance,"
by Richard A. Bettis, Andrew Chen and Vijay Mahajan
84-701
"Optimal Credit and Pricing Policy Under Uncertainty:
Claim Approach," by Chun H. Lam and Andrew H. Chen
84-702
"On the Assessment of Default Risk in Commercial Mortgage Lending,"
by Kerry D. Vandell
84-800
"Density and Urban Sprawl," by Richard B. Peiser
84-801
"Analyzing the Language of Finance: The Case of Assessing Risk," by
Gail E. Farrelly and Michael F. van Breda
84-802
"Joint Effects of Interest Rate Deregulation and Capital Requirement
on Optimal Bank Portfolio Adjustments," by Chun H. Lam and Andrew H.
Chen
Numerical Examples,"
Some Distinctions for Strategy," by William
A Contingent
84-803
"Job Attitudes and Performance During Three Career Stages," by John
W. Slocum, Jr. and William L. Cron
84-900
"Rating a New Industry and Its Effect on Bond Returns: The Case
of the AT & T Divestiture," by John W. Peavy, III and Jonathan A.
Scott
84-901
"Advertising Pulsing Policies for Generating Awareness for New
Products," by Vijay Mahajan and Eitan Muller
84-902
"Managerial Perceptions and the Normative Model of Strategy Formulation," by R. Duane Ireland, Michael A. Bitt, and Richard A. Bettis
84-903
"The Value of Loan Guarantees: The Case of Chrysler Corporation,"
by Andrew H. Chen, K. C. Chen, and R. Stephen Sears
84-110
"SLOP: A Strategic Multiple Store Location Model for a Dynamic
Environment," by Dale D. Achabal, Vijay Mahajan, and David A.
Schilling
84-111
"Standards Overload and Differential Reporting," by N. C. Churchill
and M. F. van Breda
84-112
"Innovation Diffusion:
and Robert A. Peterson
Models and Applications," by Vijay Mahajan
84-113
"Mergers andAcquisitions in Retailing:
by Roger A. Kerin and Nikhil Varaiya
84-115
"Mentoring Alternatives: The Role of Peer Relationships in Career
Development," by Kathy E. Kram and Lynn E. Isabella
84-120
"Participation in Marketing Channel Functions and Economic Performance,"
by William L. Cron and Michael Levy
84-121
"A Decision Support System for Determining a Quantity Discount Pricing
Policy," by Michael Levy, William Cron, and Robert Novack
85-100
"A Career Stages Approach to Managing the Sales Force," by William L.
Cron and John W. Slocum, Jr.
85-200
"A Multi-Attribute Diffusion Model for Forecasting the Adoption of
Investment Alternatives for Consumers," by Rajendra K. Srivastava,
Vijay Mahajan, Sridhar N. Ramaswami, and Joseph Cherian
85-201
"Prior Versus Progressive Articulation of Preference in Bicriterion
Optimization," by Gary Klein, H. Moskowitz, and A. Ravindran
85-202
"A Formal Interactive Decision Aid for Choosing Software or Hardware,"
by Gary Klein and Philip 0. Beck
85-203
"Linking Reward Systems and Organizational Cultures," by Jeffrey Kerr
and John W. Slocum, Jr.
85-204
"Financing Innovations:
John W. Kensinger
A Review and Critical Analysis,"
Tax-Deductible Equity," by Andrew Chen and
85-400
"The Effect of the WPPSS Crisis on the Tax-Exempt Bond Market,"
by John W. Peavy, III, George H. Hempel and Jonathan A. Scott
85-401
"Classifying Control Variables," by Michael F. van Breda
85-402
"Measuring the Financial Impact of Strategic Interaction: The Case
of Instant Photography," by Richard A. Bettis and David Weeks