The Value Relevance and Reliability of Brand Assets Recognized by U.K. Firms
Posted: 9 Sep 2003
We find that brand assets recognized by 33 U.K. firms are value relevant, i.e., associated with market values. Most previous studies on the value relevance of intangible assets have examined outsiders' valuations; our study adds to the literature by showing the relevance of managers' valuations of recognized intangible assets despite their contracting incentives to overvalue brands. Contracting incentives are likely to be strong in our study because brand assets are a substantial fraction of net assets: the median firm's brand assets are 44.2 percent of book value of equity (including brands).
However, we find that the market capitalization rates of brands of firms with low contracting incentives are higher than those of firms with high contracting incentives to capitalize and overstate brand values. We base our measures of contracting incentives on previous studies' findings that brand recognition helped firms (1) avoid London Stock Exchange (LSE) rules requiring shareholder approval for large acquisition or disposal transactions and (2) reduce their leverage. We thus partition our sample into subsamples according to (1) whether or not brand capitalization allowed the firm to avoid the LSE rule for at least one acquisition or disposal transaction, and (2) whether the firm's industry-adjusted debt-to-book-equity ratio was above or below the median. The difference in market capitalization rates indicates that there could be substantial differences in the extent of bias or error in brand valuations of firms with different levels of contracting incentives, i.e., brand asset measures might not be reliable.
The stock price reaction during the 21 days surrounding the first announcement of brand recognition is significantly positively associated with the recognized brand amount. The market reaction could be attributed to either the benefits of relaxing contracting constraints, or the correction of previous market undervaluation of brand-intensive firms prior to brand capitalization.
Keywords: brand assets, intangible assets, contracting incentives, value relevance, and reliability
JEL Classification: G12, M41, M44, G34
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