Brand Capital and Corporate Misconduct

Abstract

We examine the relationship between brand capital and corporate misconduct. From the Violation Tracker dataset, we collected a sample of 13,105 regulatory violations between 2000 to 2021, conducted by 606 unique US firms. First, in a sample of public firms with none and at least one violation, we examine the probability of engaging in misconduct via longitudinal studies and find that the firms with high-level brand capital are less likely to engage in any misconduct. In an additional analysis, we find that brand capital-intensive firms engage in fewer violations using the sample of only the public firms with non-zero violations. Our findings hold up to robustness and endogeneity tests. Moreover, we find evidence that firms with higher brand capital are associated with fewer penalties. Finally, we test the market reaction to penalty announcements using cross-sectional analysis. We show that firms with higher brand capital experience more negative market reactions when the penalty increases. Our findings emphasize that high levels of brand capital expose firms to investor and stakeholder scrutiny, which helps to curtail corporate misconduct and protect firms from potential reputation damage and market value loss.

Keywords: Brand Capital, Corporate Misconduct, Advertising Expense, Market Value Loss