Brand Value and Asset Pricing
Fehle, Frank, Fournier, Susan M., Madden, Thomas J., Shrider, David G., Quarterly Journal of Finance and Accounting
The idea that brand value creates financial benefits for firms has received a great deal of attention since Aaker's (1991, 1996) work in the area. For example, Dacin and Smith (1994) argue that brand is among the firm's most valuable assets. Keller (2003), who provides a summary of the literature, lists the many derivative financial benefits of creating a strong brand, which include greater customer loyalty, less vulnerability to competitive marketing actions and marketing crises, larger margins, more inelastic consumer response to price increases and more elastic consumer responses to price decreases, greater trade cooperation and support, increased marketing communication effectiveness, increased licensing opportunities, and additional brand extension opportunities. Del Vecchio, Jarvis, Klink, and Dineen (2007) even provide evidence that strong brands help attract better employees. Despite the plethora of previous research, however, whether a good brand increases shareholder value remains an open question.
This paper investigates two questions. First, does recognizable brand value increase shareholder wealth? Specifically, do firms with good brands earn abnormal returns after controlling for risk? Second, if so, how can we use this information to explain better the way assets are priced? We are the first to show abnormal stock returns for good brand firms in a robust way. We are also the first to attempt to use this information to better explain how assets are priced.
To examine whether good brands increase shareholder value, we first must define an accepted measure of what constitutes a good brand. Numbers of companies have emerged since the dawn of brand valuation in the early 1980s (e.g., Interbrand's annual list of the World's Most Valuable Brands, Millward Brown's Brand Dynamics, Total Research's EquiTrend, Young & Rubicam's Brand Asset Valuator, Brand Finance's BrandBeta Analysis) that employ analytical methods such as historic costs, replacement costs, market price, and potential earnings. We select the ranking of brand value as defined by Interbrand, the most well-known source of brand values. The Interbrand List of the World's Most Valuable Brands is published annually in the Financial Times. The Interbrand methodology is recognized by auditors, tax authorities, and stock exchanges across the world ("What a Good Name Adds Up To," 1999, p. 15). The Interbrand approach treats the brand as an intangible asset:
For each brand, Interbrand uses publicly available financial data to estimate the operating profits likely to be generated over the next five years by products carrying the brand. (A notional 2 1/2 percent growth rate was assumed for subsequent years.) It deducts a capital charge--a notional 8 percent return on the cost of capital employed--and a 35 percent tax charge to arrive at a figure called economic earnings. Interbrand then calculates the brand's contribution to those earnings by applying a role of branding index to the earnings figure, based on its own analysis of the role played by brands in different product sectors and geographical markets. Finally, a discount is applied to the earnings to reflect the amount of risk involved. A long-established brand with a strong market position and wide geographic spread, for example, receives a lower discount than a small newcomer in a fast-evolving sector ("What a Good Name Adds Up To," 1999, p. 15).
Several studies attempt to answer the question of whether a good brand increases shareholder wealth. Aaker and Jacobson (1994), using the EquiTrend database created by Total Research, examine the extent to which brand equity provides information about a firm's stock returns above and beyond the information contained in return on investment. They use a brand equity variable that is a measure of perceived product quality obtained from consumer surveys. Using a panel data set of 34 publicly traded firms between 1991 and 1993, Aaker and Jacobson regress annual stock returns on annual return on investment surprises and annual brand equity surprises, which are obtained from a first-order autoregressive panel model. They find a statistically significant positive relation between their brand equity variable and stock returns, although it is not as significant as the relation between return on investment and stock returns.
Kerin and Sethuraman (1998), who study companies on the 1995 and 1996 Interbrand's list, find a positive relation between market-to-book ratios and brand values. Given that in most cases brand values are not included in book values, this result is expected as long as brands have economic value. Kerin and Sethuraman's findings, however, do provide valuable insight into one of the components of the difference between market value and book value. We test whether this difference simply is subsumed into a difference between high growth and low growth firms in Fama and French's (1993) framework.
Using the Interbrand data, Madden, Fehle, and Fournier (2006) investigate whether strong brands increase shareholder wealth. Controlling for risk using Fama-French methodology, they find that firms on the list earn abnormal returns. Madden et al. also examine return on investment using Aaker and Jacobson's (1994) approach. Although they focus on the marketing implications of their results, in both cases, Madden et al. find evidence of benefits to shareholders for good brands.
We provide evidence that firms with the best brands have value that is not priced fully by conventional asset pricing models. We study the stock market performance of a sample of firms that appear on the Interbrand list between 1994 and 2000. Using monthly return data, the portfolio of sample firms is found to have statistically and economically significant better performance than the overall market, even after adjusting for risk using the Fama-French three-factor model plus a momentum factor. The results are robust to alternative explanations such as differences in firm size, product market share, and the time period of the sample. We also find evidence that the brand values (i.e., dollar values) published by Interbrand contain information beyond the information provided by being a member of the Interbrand list.
We use the information from brand values to understand better how equities are priced. This is interesting because, if successful, it would add theoretical support to the Fama-French three-factor model. Fama-French methodology has become a mainstay within the finance literature due to its empirical success, but it is still without much theoretical support. One possibility for the lack of such support is that, rather than a direct link between the Fama-French factors and a theoretical explanation, these broad factors proxy for a number of other more specific sources of risk. Although the book-to-market (BE/ME)--or high-minus-low (HML)--factor often is explained loosely as a measure of financial distress, we hypothesize that HML is also a measure of intangible assets. Specifically, we examine whether the HML factor is partially a measure of brand value.
Several rationales support the hypothesis that brand value is linked to the market value of a firm's equity. For example, high brand value might smooth earnings in cyclical industries or in general periods of lower sales. During these downturns, consumers tend to spend less. Because of consumer comfort with good brands, sales of these products tend not to drop as much as the industry in general. Brand value also may provide protection from competitors due to increased customer loyalty. In these scenarios, brand value is a more detailed explanation of the HML factor as firms with better brands do not suffer as much from external threats and, therefore, are less likely to experience financial distress.
In support of our hypothesis, we first show that when brand value is included, firms with strong brands move dramatically in terms of their BE/ME ratio decile. We then create a separate factor within the context of the Fama-French framework that attempts to measure return sensitivity to brand value directly. This factor uses a portfolio of finns with high brand value as identified by Interbrand and a matching portfolio of finns that have never appeared on the Interbrand list. We find that this factor does not subsume the Fama-French HML factor.
Data and Methodology
The initial sample universe consists of all stocks in the CRSP database that were listed at any time between December 31, 1993, and December 31, 2000. The final sample contains 13,409 stocks for which monthly returns and market capitalizations are obtained. We then compiled Interbrand's annual list of the World's Most Valuable Brands for 1994 to 2001 with the exception of 1998, for which the Interbrand data are not available. (1) See the appendix for a detailed explanation of Interbrand's approach to establishing brand value. (2) From 1994 to 1997, Interbrand published a list of individual brand values that are matched to the companies owning the brands. If a company owns several brands on the Interbrand list, the individual brand values are summed to obtain the value of the brand portfolio. Since 1999 Interbrand has distinguished explicitly between brand portfolio companies and companies that derive most brand value from one primary brand. For the brand portfolio companies, Interbrand publishes the aggregated value of the brand portfolio, which is used for this study.
Our base sample of strong brands includes 111 companies that appear on Interbrand's list at least once during the sample period (Table l). List membership is fairly stable during the sample period with each company appearing on average in 3.6 of seven lists. On average, the brand values estimated by Interbrand constitute 37 percent of a company's market capitalization with a standard deviation of 35 percent.
Compustat data are used to compute annual BE/ME ratios from 1993 to 2000 following the methodology in Davis, Fama, and French (2000). These data are available for 12,214 of the 13,409 CRSP companies. BE/ME ratios are available for all but one of the strong-brand companies. Compustat data also are used to obtain primary SIC codes, annual net sales, and annual advertising expenses for the 12,214 companies.
Abnormal Return Methodology
To assess the stock market performance of companies with strong brands, we create different portfolios of strong-brand firms and comparison portfolios. We then examine the average stock market returns after controlling for risk. For example, portfolio 1 is a value-weighted portfolio of all 111 Interbrand companies that is formed with monthly rebalancing. (3) The comparison portfolio is a value-weighted portfolio of …
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Publication information: Article title: Brand Value and Asset Pricing. Contributors: Fehle, Frank - Author, Fournier, Susan M. - Author, Madden, Thomas J. - Author, Shrider, David G. - Author. Journal title: Quarterly Journal of Finance and Accounting. Volume: 47. Issue: 1 Publication date: Winter 2008. Page number: 3+. © 2009 University of Nebraska-Lincoln. COPYRIGHT 2008 Gale Group.
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