The Impact of Brand Quality on Shareholder Wealth

Abstract

This study examines the impact of changes in brand quality that are unanticipated by investors on three components of shareholder wealth: stock returns, systematic risk and idiosyncratic risk. The study finds that such changes in brand quality enhance shareholder wealth by being positively associated with stock returns and negatively related to changes in idiosyncratic risk. However, unanticipated changes in brand quality can also erode shareholder wealth as they have a positive association with changes in systematic risk. The study introduces a contingency theory view to the research in the marketing-finance interface by analyzing the moderating role of two factors that are widely followed by investors. The results show that when firms do not trade off increases in current period earnings for changes in brand quality, firms are rewarded with enhanced stock returns and lowered systematic risk. Similarly, brand quality is valuable for firms, since the positive impact of unanticipated increases in brand quality on stock returns is larger when facing increasing competition. 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.

Keywords: Brand Quality, Stock Returns, Idiosyncratic Risk, Systematic Risk, Earnings, Industry Concentration, Marketing-Finance Interface