The Effect of Brand Assets on Firm Risk

Investors and managers evaluate potential investments in terms of risk and return. Empirical research in marketing has focused on linking marketing activities with returns but has neglected marketing’s role in determining firm risk. Yet, the theoretical literature asserts that investments in market-based assets such as brands should lead to reductions in firm risk. Researchers in finance, accounting, and strategic management view risk in terms of the vulnerability and volatility of the firm’s cash flows and returns from the perspective of the firm’s claimants − debtholders and shareholders. We adopt measures of risk, as viewed by these claimants, that have been well established in the finance and accounting literature. We use credit ratings to capture the debtholder risk the standard deviation of stock returns to measure shareholder risk, which we then further decompose into systematic and unsystematic equity risk. We examine the impact of brand assets on risk using data covering 207 firms from EquiTrend, COMPUSTAT and CRSP over the period 2000-2006. Controlling for a range of variables previously linked with risk in the finance and accounting literatures, we find that a firm’s brand equity and the number of large brands in its portfolio are associated with lower risk (higher credit ratings and lower equity risk). Our results have clear economic as well as statistical significance.