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. …