The Impact of Brand Quality on Shareholder Wealth

Sundar G. Bharadwaj · Kapil R. Tuli · André Bonfrer

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Corporate Identity and Reputation Financial Markets and Investment Strategies Corporate Finance and Governance

Abstract

This study examines the impact of brand quality on three components of shareholder wealth: stock returns, systematic risk, and idiosyncratic risk. The study finds that brand quality enhances shareholder wealth insofar as unanticipated changes in brand quality are positively associated with stock returns and negatively related to changes in idiosyncratic risk. However, unanticipated changes in brand quality can also erode shareholder wealth because they have a positive association with changes in systematic risk. The study introduces a contingency theory view to the marketing–finance interface by analyzing the moderating role of two factors that are widely followed by investors. The results show an unanticipated increase (decrease) in current-period earnings enhances (depletes) the positive impact of unanticipated changes in brand quality on stock returns and mitigates (enhances) their deleterious effects on changes in systematic risk. Similarly, brand quality is more valuable for firms facing increasing competition (i.e., unanticipated decreases in industry concentration). The results are robust to endogeneity concerns and across alternative models. The authors conclude by discussing the nuanced implications of their findings for shareholder wealth, reporting brand quality to investors, and its use in employee evaluation.

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References

1993Common risk factors in the returns on stocks and bonds 1997On Persistence in Mutual Fund Performance 1993Conceptualizing, Measuring, and Managing Customer-Based Brand Equity 1988The Theory of Industrial Organization 2005The economic implications of corporate financial reporting 2001The theory and practice of corporate finance: evidence from the field 1959Portfolio Selection: Efficient Diversification of Investments 1989Theory of Industrial Organization.

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