Brand Capital and Firm Value

Abstract:     
We study the role of brand capital - a primary form of intangible capital - for firm valuation and risk in the cross-section of publicly traded firms. Using a novel empirical measure of brand capital stock constructed from firm level advertising expenditures data, we estimate that the value of the brand capital stock represents about 30% of firms’ market value. In addition, we show that: firms with high brand capital investment rates underperform firms with low brand capital investment rates by 7% per annum; more brand capital intensive firms outperform less brand capital intensive firms by 4.1% per annum; and investment in both brand capital and physical capital is volatile, has positive but low autocorrelation, and is strongly procyclical. A neoclassical investment-based model augmented with brand capital simultaneously matches the asset pricing facts and the time-series properties of firm-level brand capital and physical capital investment. Our findings highlight the importance of brand capital for understanding firms’ market value and risk.

Number of Pages in PDF File: 56

Keywords: intangible capital, q-theory, cross-section of stock returns

JEL Classification: G12, G14, E32

working papers series