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Branding and Firm Value

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7 Branding and  rm value
Shuba Srinivasan, Liwu Hsu and Susan Fournier
INTRODUCTION
Although branding is widely recognized as an important marketing activ-
ity, marketing executives are increasingly challenged to prove the value of
branding in clear  nancial terms (Ambler, 2003). In response to this call,
there has been growing academic research on branding impact on share-
holder value and  rm risks (Lehmann and Reibstein, 2006; Marketing
Science Institute, 2008). Several major conferences focus on linking
marketing strategy to Wall Street, including Marketing Science Institute
events in 2002 (Dallas) and 2009 (Emory Marketing Institute, Atlanta), as
well as a third conference in 2011 (Boston University). Dedicated publica-
tions address the topic, including two special issues in the Journal of the
Academy of Marketing Science (2003) and the Journal of Marketing (2009)
and two books (Ambler, 2003; Rutherford and Knowles, 2007). More
than ten years ago, Kerin and Sethuraman (1998, p. 260) stated that:
it is generally claimed that brand names are a corporate asset with an economic
value that creates wealth for a  rm’s shareholder. However, the scholarly litera-
ture has neither provided a comprehensive theoretical basis for this claim nor
documented an empirical relationship between brand value and shareholder
value.
The marketing  eld has since come a long way in demonstrating that
branding in uences the shareholder value, with chief executive o cers,
chief  nancial o cers, and boards now truly paying attention to building,
developing, and maintaining their brands.
The objective of this chapter is to integrate emerging insights from the
literature on branding and shareholder value into a process framework
that helps enumerate and explain the brand– nance link. Figure 7.1
provides the conceptual framework for investigating the e ects of brand-
ing on shareholder value and provides a road map for the organization
of the chapter. This  gure builds from Lehmann’s (2004) marketing pro-
ductivity chain linking marketing actions to  rm value by incorporating
a decompositional model of brand equity (Feldwick, 1996a; Keller and
Lehmann, 2006).
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156 Handbook of marketing and  nance
This chapter proceeds as follows. First, we discuss the reasons why
shareholder value (i.e., stock returns and risks) is an appropriate metric to
assess brand performance and brand value. In the context of discussing the
rm value approach, we introduce common measures of the core depend-
ent variable: shareholder value, exploring such concepts as Tobin’s Q,
abnormal returns, and idiosyncratic and systematic risk. As brand equity
is a complex concept, we focus on three principle and distinct perspectives
on brand equity (i.e., customer- based, product market- based, and  nance-
based indicators) in explaining the branding–shareholder value link.
Second, the chapter delineates two mechanisms that govern the branding–
nance interface to address whether and how branding a ects sharehold-
ers: the brand- as- information and the brand- as- asset routes. Key  ndings
from the extant literature on branding and shareholder value are sum-
marized to support these process routes. Third, the chapter considers two
strategy- level antecedents of brand equity creation, again reviewing extant
literature to qualify e ects on  rm value and cash  ow: organization- level
strategy (e.g., corporate name strategy, mergers & acquisitions) and brand
strategy (e.g., brand extensions and brand portfolio strategy). Fourth, we
discuss brand management tools such as advertising and promotions for
building brand equity and in uencing shareholder value.
1
The chapter
Marketing Actions Brand Equity
Cash Flow Firm Value
Corporate brand strategy
Corporate naming strategy
Mergers & acquisitions
Brand culture and capability
Corporate social responsibility
Finance-based indicators
Intangible asset value
Inter-brand brand value
Market-based indicators
Price premium
Revenue premium
ACV distribution
Sales
Market share
Customers based indicators
Brand awareness
Brand associations
Brand attitude
Brand behaviors
Acceleration of
cash ows
Increase in level of
cash ows
Decrease in the
volatility and
vulnerability of cash
ows
Enhancement of the
residual value of
cash ows
Stock returns
Systematic risk
Idiosyncratic risk
Debt-holder risk
Upside/Downside
risk
Brand-as-asset
Brand-as-information
Brand-building tools
Advertising
Promotions
(Distribution)
(Product)
Branding strategy
Trademarks
Brand licensing
Brand extensions
Brand alliances
Brand portfolio strategy
Note: ACV = all commodity volume.
Figure 7.1 Conceptual framework: how branding a ects rm value
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Branding and  rm value 157
concludes with an agenda for future studies that addresses gaps and
challenges in this important and growing area of research.
BRANDING AND FIRM VALUE
In assessing the value impact of branding, most prior research has focused
on intermediary market outcome metrics such as price (Chaudhuri and
Holbrook, 2001) and market share (Smith and Park, 1992). Aaker and
Jacobson (2001, p. 485) proposed that current- term accounting measures,
such as return on investment (ROI) and earnings, cannot appropriately
re ect  rm value, because ‘they fail to capture the bene ts of investing in
intangible assets such as brands.’ In reality, developing a successful brand
requires signi cant investments of e ort and resources. In addition, a de n-
ing characteristic of brand assets (e.g., brand equity) is that they are inher-
ently slow- moving and not immediately visible (Srinivasan and Hanssens,
2009); changes in a well- managed brand’s equity are usually slow to mani-
fest on a  rm’s bottom- line measures (Ambler, 2003). As such, long- term
brand value is less likely to be captured by backward- looking accounting
measures such as pro t and return on assets. Furthermore, non- nancial
market measures of brand valuation can su er from shortcomings such as
inherent subjectivity, lack of theoretical underpinnings, and inadequacy
through representation in a single brand equity measure. Given these
realities and challenges, the gold standard metric for assessing branding’s
impact on the  rm is shareholder value, which is determined by levels of
stock returns and the volatility associated with those returns (Srinivasan
and Hanssens, 2009). According to the shareholder value perspective, the
main objective of companies is to maximize shareholders’ return on their
equity (Rappaport, 1997). Rappaport (1987, p. 57) also notes that ‘[b]y
closely reading the stock market, managers can  nd out whether proposed
strategies will be e ective.’ Commonly used metrics of shareholder value
include stock returns, market capitalization, and Tobin’s Q; systematic
risk and idiosyncratic risk also serve as key metrics for publicly traded
companies (Tuli and Bharadwaj, 2009) (see the last column titled ‘Firm
Value’ in Figure 7.1). Table 7.1 provides an overview of common  nancial
metrics, including their de nitions and operationalizations.
Branding can be viewed as a strategic tool for managing a  rm’s risk
exposure. A strong brand, for example, can encourage broader stock
ownership, insulate a company from market downturns, grant protection
from equity dilution in the case of product failures, and reduce variability
in future cash  ows (Frieder and Subrahmanyam, 2005; Rego et al., 2009).
Still, with some exception (Madden et al., 2006; Luo and Bhattacharya,
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158
Table 7.1 Relevant  nancial metrics for assessing brand equity
Financial Metrics De nition Measure Characteristics Illustrative Papers
Returns/levels metrics
Stock returns Change in the total
value of a stock over
some period of initial
investment
Price
t
1 Divi
d
en
d
t
2 Price
t2 1
Price
t2 1
A stationary time-
series of stock
returns is
obtained as
a dependent
variable
Mizik and Jacobson
(2003)
Srinivasan et al.
(2009)
Tobin’s Q (q- values) Ratio of market value
of the  rm to the
replacement cost of the
rm’s assets
Mar
k
et price
Replacement cost of asset
Tobin’s Q estimates
have smaller
average errors
and greater
correlation with
true measures as
compared with
accounting rates
of return
Simon and Sullivan
(1993)
Rao et al. (2004)
Market- to- book ratio
(M/B)
Ratio of current share
price to the book value
per share
Mar
k
et va
l
ue
Book equity
M/B > 1 signals
rms creating
value for its
shareholders
Kerin and
Sethuraman (1998)
Pauwels et al. (2004)
Market capitalization Share price multiplied
by the number of
outstanding shares
Stock price
× Number of shares outstanding
Forward-
looking measure,
providing investor
expect ations of
the  rm’s future
pro t
Fornell et al. (2006)
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159
Risk/volatility metrics
Cash  ow volatility Ratio of  rm’s cash  ow
coe cient of variation
(CV) to the market’s
cash  ow coe cient of
variation (CV)
Firm
s cas
h
fl
ow CV
Markets cash flow CV
Can explain as
much as 80%
of the variation
in systematic
market risk
Gruca and Rego
(2005)
Fischer et al. (2009)
Abnormal returns
(
a
i
)
Di erence between
the expected return of
a stock and the actual
return
Carhart four-factor model:
R
it
2 R
rf,t
5 a
i
1 b
i
(
R
mt
2 R
rf,t
)
1 s
i
SMB
t
1
h
i
HML
t
1 u
i
UMD
t
1 e
it
where e
it
, N
(
0, s
e
it
)
Positive abnormal
returns indicates
outperformance
Joshi and Hanssens
(2009)
Hsu et al. (2010)
Systematic risk
(
b
i
)
The part of stock
volatility that is
explained by changes
in average market
portfolio returns
Cannot be
mitigated
through
diversi cation
Fornell et al. (2006)
Madden et al.
(2006) McAlister
et al. (2007)
Idiosyncratic risk
(
s
e
it
)
The variability that
is not explained by
changes in average
market portfolio return
but instead by  rm-
speci c events
Accounts for
approximately
80% of total risk
on average
Luo (2007)
Luo and
Bhattacharya
(2009)
Downside (Upside)
risk
The observed variability
in a  rm’s stock returns
accounted for by equity
market movements
when the stock market
declines (rises)
cov
(
r
i
, r
m
0
r
m
, m
m
)
var
(
r
m
0
r
m
, m
m
)
where r
i
(
r
m
)
is security i’s (the
market’s) excess return, and m
m
is the
average market excess return
a
Only assets that
magnify the
market’s
downward swings
are viewed as
risky
Bawa and
Lindenberg (1977)
Rego et al. (2009)
Tuli and Bharadwaj
(2009)
Note: a. Here, we provide the measure of downside risk. For details on the measure of upside risk, please see Chen (1982).
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160 Handbook of marketing and  nance
2009; Rego et al., 2009), few studies examine branding e ects on  rm risk.
Given that managers and investors are inherently risk- averse (Swedroe
and Grogan, 2009) and seek to maximize returns while minimizing risk
exposure, it is crucial for management to consider risks. Without con-
sidering stock price volatility, managers are not able to assess ‘whether
expected returns o er adequate compensation for the inherent level of
risk’ (Anderson, 2006, p. 587).
Total risk has two components: systematic risk and idiosyncratic or
rm- speci c risk. Systematic risk stems from exogenous macroeconomic
factors that a ect the overall stock market or particular industries (e.g.,
interest rate shifts, exchange rates, macroeconomic developments, indus-
try concentration). Systematic risk re ects sensitivity to overall market
changes and is a function of the extent to which a  rm’s stock returns
change when the overall market changes. Idiosyncratic risk is the risk asso-
ciated with micro,  rm- speci c circumstances, characteristics, or activities
(e.g., research and development pipeline, marketing mix decisions, brand
portfolio strategy), after general market variation is accounted for; it con-
cerns the proportion of returns that move independently of market- wide
returns. Although idiosyncratic risk accounts for upwards of 80 percent
of total risk (Goyal and Santa- Clara, 2003), there is robust evidence
supporting the importance among managers and investors of examining
systematic risk as well as idiosyncratic risk as both have been shown to be
related to  rm value (Bansal and Clelland, 2004; Ang et al., 2006; Brown
and Kapadia, 2007; Ferreira and Laux, 2007).
Di erent stakeholders have di erent perspectives on  rm risks. Rego et
al. (2009) view risk from both debt- holder and equity- holder perspectives.
Per  nance theory, the former deals with the vulnerability of the  rm’s
future cash  ows because it determines the ability of the  rm to deal with
existing debt (Merton, 1974). The latter focuses on the total equity risk
as the variability of a  rm’s stock returns, which is driven by the capital
asset pricing model (Sharpe, 1964). Recently, researchers have started to
distinguish between upside risk, the  rm’s stock risk when stock returns
are increasing overall (Rego et al., 2009; Tuli and Bharadwaj, 2009), and
downside risk, the  rm’s stock risk when stock returns are decreasing
overall (Harlow, 1991; Miller and Leiblein, 1996; Ang et al., 2006).
2
We
highlight the important characteristics of each  nancial metric as shown
in Table 7.1.
Metrics of Brand Equity
To assess the impact of branding on  rm performance, marketers need a
clear understanding of brand equity and the associated metrics whereby
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Branding and  rm value 161
it can be gauged. Brand equity is a complex concept with many di erent
applications and meanings among academics, marketing managers, and
marketing research professionals. A useful way of organizing these varied
conceptions is provided in the brand value chain, which posits three dis-
tinct components of brand equity: brand meaning, brand strength, and
brand value (Feldwick, 1996b). As interpreted by Keller and Lehmann
(2006), these components vary in terms of whether the perspective of
the consumer (customer- based brand equity or CBBE), product market
(market- based brand equity or MBBE) or  nancial market ( nancial-
based brand equity or FBBE) is adopted. From the customers’ perspec-
tive, brand equity re ects how customers perceive and react di erentially
to a branded o ering versus an unbranded commodity o ering. From the
product market perspective, brand equity is the value- added performance
of a branded o ering compared to an equivalent unbranded one. From the
nancial market perspective, brand equity represents the value of an asset
that can be traded and can be thought of as the net present value of antici-
pated future purchases of the brand. As seen in the column titled ‘Brand
Equity’ in Figure 7.1, the brand equity chain can be viewed as a hierarchy-
of- e ects model wherein CBBE is a precursor of MBBE, which, in turn,
is a precursor of FBBE. Research supports that all three components of
brand equity have direct links to cash  ows but can also drive  rm value
directly (Barth et al., 1998; Srivastava et al., 1998; Madden et al., 2006).
This framework is su ciently general in that it allows for both simultane-
ous e ects as well as complex patterns of temporal causality concerning
the e ects of marketing actions on shareholder value. In what follows,
we summarize the measurement and valuation of brand equity at these
three di erent levels of operationalization and set the stage for a review of
research on branding– rm value e ects.
Customer- based brand equity (CBBE)
Customer- based brand equity, de ned as ‘the di erential e ect of brand
knowledge on consumer response to the marketing of the brand’ (Keller,
1993), is the most commonly used equity measure among both research-
ers and practitioners (Agarwal and Rao, 1996). The di erential consumer
response to the brand has been operationalized by a range of market
research suppliers, each supporting di erent metrics. Some of the more
popular CBBE indicators are EquiTrend’s perceived quality measure,
Millward Brown’s BrandZ indicator, and Ipsos’s Equity*Builder, which
measure the consumers’ emotional attachment to a brand. Young &
Rubicam’s BrandAsset Valuator (BAV) model proposes two dimensions
of brand equity, each with two sub- components: brand strength includes
brand di erentiation and the relevance of the brand to the consumer,
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162 Handbook of marketing and  nance
whereas brand stature considers the brand’s esteem and consumer’s
knowledge (awareness and understanding) of the brand (Agres and
Dubitsky, 1996). A recent addition is brand energy, which captures the
degree to which a brand is perceived as innovative and dynamic (Mizik
and Jacobson, 2008).
Researchers have also considered the classical hierarchy of percep-
tual and behavioral metrics of CBBE namely, brand awareness (aided
and unaided), brand associations, brand attitude, and brand behaviors,
notably brand loyalty. Brands associations comprise the network of
cognitive linkages that consumers hold in their memory regarding the
brand (Keller, 1993). Brand attitude is de ned as consumers’ integrated
evaluations of a brand ( Wilkie, 1986; Keller, 1993); customer satisfac-
tion as measured by the American Customer Satisfaction Index (ACSI)
serves as a popular attitudinal brand equity metric (Anderson et al., 1994).
Perceived brand quality, de ned as the consumer’s perception about a
product’s overall satisfaction with reference to the available alternatives
(Zeithaml, 1988), is also notable as are measures of corporate reputation
such as Fortune’s most admired brands (Roberts and Dowling, 2002) and
Kinder, Lydenberg, and Domini’s measure of corporate social perform-
ance (KLD) (Kinder, Lydenberg, Domini & Co. Inc., 1999). In terms of
behavioral indicators, commonly used metrics include the net promoter
score (Reichheld, 2003) and brand loyalty. Oliver (1999, p. 34) de nes
brand loyalty as ‘a deep- held commitment to rebuy or repatronize a pre-
ferred product/service consistently in the future, thereby causing repetitive
same- brand or same brand- set purchasing, despite situational in uences
and marketing e orts having the potential to cause switching behavior.’
Overall, while CBBE measures comprehensively re ect customer assess-
ments of brand equity, a legitimate criticism is the absence of indicators
of both the brand’s product market and  nancial performance in such
metrics (Taylor et al., 2007).
Market- based brand equity (MBBE)
A second perspective on brand equity is based on market- level manifesta-
tions. Some researchers claim that no matter how brand equity is meas-
ured or for what purposes measurement serves, the value of the brand
‘must ultimately be derived in the marketplace’ (Hoe er and Keller,
2003, p. 421). Metrics that re ect marketplace performance of the brand
include price premium, revenue premium, increased advertising elasticity,
and the ability to obtain distribution channel and shelf space, in addition
to traditional market performance measures such as sales, pro t, and
market share (Boulding et al., 1994). Amongst these, the most commonly
used metric is the price premium measuring the premium consumers are
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Branding and  rm value 163
willing to pay for a national brand over a private label brand (Aaker,
1992, 1996; Chaudhuri and Holbrook, 2001). The price premium com-
manded by a strong brand can increase the  rm’s pro t and provide
resources to reinvest in the brand (Aaker, 1992). Ailawadi et al. (2003)
propose revenue premium as another market- level measure of brand
equity. Similar to price premium, revenue premium is the di erence in
revenue (i.e., price × volume) for a branded good versus a private label
good. Although many managers consider MBBE, which measures brand
performance on a product market level, a crucial measure of success for
branding e orts, at publicly traded companies, the board of directors is
typically more concerned with whether a linkage between branding and
shareholder value exists at the  nancial market level. Still, MBBE meas-
ures are relatively easy to calculate and fully re ect the top- line perform-
ance measures that serve as standing goals for a majority of marketing
managers. As for customer- based metrics, MBBEs also fall short since
they do not link branding with the ultimate  rm performance metric of
shareholder value.
Financial- based brand equity (FBBE)
A third approach to measuring brand equity is based on  nancial market
performance (Amir and Lev, 1996). Here, brand equity is estimated
from the residual in the model of the value of a  rm’s assets (Simon and
Sullivan, 1993). Such approaches typically decompose  rm value into tan-
gible assets such as plant and equipment or net receivables, and intangible
components re ecting goodwill and brand investments and other forms
of intellectual property. From an accounting perspective, brand equity is
an accumulated intangible asset enhanced by marketing expenditures and
brand management tools (Ambler, 2003) that generates future cash  ows
or reduces the volatility of future cash  ows. Investors appear to consider
brand value in their stock evaluations (Barth et al., 1998).
Increasingly, researchers have used a composite of customer- based and
market- based brand equity metrics to derive estimates of  nance- based
brand equity. An example of this ‘price–earnings multiple’ approach is
Interbrand’s brand equity valuation (Kerin and Sethuraman, 1998), which
considers branded earnings (i.e., economic pro ts attributable to brand)
times brand strength (as an indication of the discount rate for future
brand revenue streams). The Interbrand valuation metric thus combines
the subjective consumer mindset of brand equity with objective brand
performance in the product market. FBBE is growing in appeal and in use
as a metric of brand equity that goes well beyond short- term sales, pro ts,
and market share. Still, FBBEs are subject to criticisms of subjectivity and
lack strong theoretical underpinnings.
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164 Handbook of marketing and  nance
HOW DOES BRANDING AFFECT FIRM VALUE?
In this section we turn to the question of how exactly branding a ects rm
value. In Figure 7.1, we posit two process mechanisms that make explicit
the contribution of branding to  rm value creation. First is a direct route
wherein the brand- as- asset enhances  rm value directly through its e ects
on cash  ows. Second is an indirect route that considers the brand not as
an asset but as information. In this route, the brand acts as a visible signal
of the  nancial well- being of the  rm.
Cash Flow Framework: Brands- as- assets
Research suggests that investors perceive incremental information on
branding activities as contributing to expectations of future cash  ows
(Srinivasan and Hanssens, 2009). Arguing from a resource- based view
of the  rm, Doyle (2001) proposes that brands are intangible assets that
increase the level of cash  ows and reduce the vulnerability of these  ows.
Srivastava et al., (1998) propose that market- based assets such as brands
can increase shareholder value through (1) an acceleration of cash  ows,
(2) an increase in the level of cash  ows, (3) a decrease in the volatility
and vulnerability of cash  ows, and (4) an enhancement on the residual
value of cash  ows. Under the e cient markets model (Fama, 1970),
stock prices at any point in time fully re ect available information and
provide an expectation of discounted future cash  ows. For example,
when a brand extension announcement occurs, investors will decide to buy
or sell company stock based on expectations of how the brand extension
will a ect future cash  ows (Lane and Jacobson, 1995). If investors value
such brand extensions, this will result in increases in stock price. Apple’s
announcement of successive generations of the iPhone (3G, 3GS, 4G)
resulted in acceleration of cash  ows as well as increases in the levels of
cash  ows for Apple. The enhanced cash  ows that investors value favo-
rably derive from marketing advantages of strong brands such as greater
customer loyalty, increased marketing communication e ectiveness,
and elevated perceptions of product market performance, resulting in
improved top- line and bottom- line performance. Successful co- branding
alliances, such as, for example, General Mills’s partnership with Hershey
to provide Betty Crocker brownie mix co- branded with Hershey’s choco-
late, enables both  rms to enhance their cash  ows (Bucklin and Sengupta,
1993; Leuthesser et al., 2003). The leverage of strong brands through
extensions or alliances allows brands to increase revenues by exploring
new markets and extending the customer base.
Strong brands can also reduce volatility of cash  ows because they are
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Branding and  rm value 165
perceived as higher- quality o erings (Aaker and Jacobson, 1994) that can
lower price sensitivity among consumers and in turn, protect cash  ows
(Sivakumar and Raj, 1997). As an example, Kellogg’s pro ts in 3Q 2009
rose 6 percent despite an economic downturn as a result of strong loyalty
to its brands (Skidmore, 2009). The vulnerability of cash  ows is also
reduced since strong brands are less susceptible to the harmful e ects of
marketing crises and competitive marketing actions (Aaker, 1996). For
example, consider the 2009 safety scandal involving Toyota’s Prius hybrid.
Although Toyota’s market share in the US dropped from 16.6 percent
to 15.2 percent through the  rst three quarters of 2010, their total sales
increased by 16.8 percent in September 2010 as compared to September
2009, indicative of a healthy rebound in market performance (The Wall
Street Journal Market Data Center, 2010).
The residual of value of cash  ows re ects the expected value of market-
based brand assets beyond the market forecast (Rappaport, 1997). Cash
ow residuals are positively in uenced by successful brand extensions or
the size and loyalty of the customer base, which accounts for a signi cant
proportion of the net present value of a business. For example, Apple Inc.
shares traded above $300 for the  rst time on 13 October, 2010, primarily
due to the release of iPad tablet, which sold more than 3 million units in its
rst quarter of availability (Sherr, 2010).
Each of these four drivers inherently involve supply- side/demand- side
advantages and disadvantages, which, in turn, in uence the future levels
and riskiness of cash  ows (Rao et al., 2004).
Signaling Framework: Brands- as- information
Research suggests that stock markets re ect an environment of informa-
tion asymmetry between  rms and investors (Myers and Majluf, 1984).
The signaling framework (Spence, 1973) contends that economic informa-
tion that is uniquely known by management (e.g., competitive viability)
will be conveyed to shareholders through various signals, one of which is
the brand. The socio- cultural view of branding (McCracken, 1988; Holt,
2004) also emphasizes the role of brand as a meaning- laden signaling
device. Speci cally, Keller (2007) de nes brand as a collection of asso-
ciations that convey information to consumers. Brand positioning is the
strategic discipline through which brand information is summarized, but
all brand actions and programs send signals of brand meaning and equity
to consumers and investors of the  rm.
Consistent with this view of brands- as- information, several studies in
marketing (Agrawal and Kamakura, 1995; Lane and Jacobson, 1995;
Mathur and Mathur, 1995, 1996) use a signaling perspective to explain
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166 Handbook of marketing and  nance
the e ects of branding on  rm stock prices. Research suggests that  rms
with high brand equity as gained through increased advertising expen-
ditures have a larger breadth of ownership of the  rms’ stock because
investors perceive greater and more accurate information  ows about
such companies (Grullon et al., 2004). Similarly,  rms with strong brands
are well- known and this reputation e ect signals lower risks of the  rm’s
stock to the investors (McAlister et al., 2007; Rego et al., 2009). There is
evidence that investors prefer to seek and hold the stocks of well- known
rms because investors are cognitively unable to apply the same level of
expertise across an entire universe of stocks (Shiller, 2002; Frieder and
Subrahmanyam, 2005). In this context, advertising can help attract a
disproportionate number of investors who, at least in part, make their
investments based on brand familiarity rather than fundamental informa-
tion (Grullon et al., 2004; Singh et al., 2005). Furthermore, investors are
particularly sensitive to signals of a  rm’s action beyond publicly avail-
able information such as corporate news releases and third- party business
publications (Ross, 1977). Investors favor  rms with more reliable infor-
mation (Klein and Bawa, 1977) and greater information  ows (Merton,
1987).
FINDINGS ON BRANDING AND FIRM VALUE
The questions of whether and how branding a ects rm performance
have been addressed in many recent studies on branding and  rm value.
In the three sections to follow, we summarize key  ndings concerning our
conceptual framework (see Figure 7.1) and organize our discussion as
follows. First, we discuss whether branding even matters and, if so, how
branding a ects shareholder value by considering branding’s impact at
the three levels of customer- , market- and  nancial- based brand equity.
We then turn to the antecedents or drivers of strong brands to discuss
ndings concerning corporate strategy and brand strategy on  rm value.
We then discuss the relationship between brand management tools (e.g.,
advertising) and shareholder value.
FINDINGS ON BRAND EQUITY AND FIRM VALUE
Customer- based Brand Equity
Table 7.2 details each dimension of brand equity and its e ects on nancial
metrics.
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167
Table 7.2 Summary of key  ndings on the impact of brand equity metrics on  rm value
a
De nition Empirical Findings Data Sources Illustrative Papers
1. Customer- based brand equity
Brand strength
Brand
di erentiation
The ability of the
brand to stand apart
from its competitors
Brand distinctiveness has positive in uence
on overall  nancial performance
Brand di erentiation has lagged e ect
The positive relationship between brand
equity and shareholder value is most
pronounced when using the market- to-
book value as an indicator of shareholder
value
Y&R BAV
model
DataStream
CRSP
Compustat
Aaker (2003)
Mizik and
Jacobson (2008)
Pahud de
Mortanges and
Van Riel (2003)
Wong and
Merrilees
(2008)Brand relevance Personal relevance and
appropriateness and
perceived importance
of the brand
Brand relevance provides incremental
information and has the potential to
generate higher future pro t
Brand energy The ability of a brand
to meet customers’
needs and adapt to
changing tastes in the
future
Brand energy provides incremental
information in explaining stock
performance
Brand stature
Brand esteem The extent to which
consumers like a
brand and hold it in
high regard
There is no direct e ect of esteem on stock
return
The investors perceive incremental e ect of
esteem in the future only when the increase
in brand esteem enhances the pro ts
Y&R BAV
model
Survey
CRSP
Compustat
Baldauf et al.
(2003)
Frieder and
Subrah-
manyam (2005)
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168
Table 7.2 (continued)
De nition Empirical Findings Data Sources Illustrative Papers
Brand knowledge Brand awareness
and consumers’
understanding of the
brand identity
There is no signi cant direct e ect of
brand knowledge on stock return
Brand knowledge indirectly a ects the  rm
value through its in uence on sales growth
Mizik and
Jacobson (2008)
Pahud de
Mortanges and
Van Riel (2003)
Brand behavior
Brand attitude Consumers’ overall
evalutions of a brand
Brand attitude is associated with
stock return and provides incremental
information contained in accounting measures
Improvement in the predictive power of
rm value by 16% in models that take into
account brand metrics
Techtel
Corporation
Landor Image
Power Survey
Y&R BAV
model
Aaker and
Jacobson (2001)
Lane and
Jacobson (1995)
Mizik and
Jacobson (2009)
Brand/customer
loyalty
A deep- held
commitment to rebuy
or repatronize a
preferred product/
service consistently
in the future, thereby
causing repetitive same-
brand or same brand-
set purchasing, despite
situational in uences and
marketing e orts having
the potential to cause
switching behavior
1% improvement in retention increases
rm value by 5%
Annual reports
10- K statement
10- Q statement
Gupta et al.
(2004)
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169
Perceived quality Consumer’s judgment
about a brand’s
overall excellence or
superiority
Improved perceived quality has a positive
impact on stock prices
Perceived quality signi cantly increases
brand pro tability, market share, and
customer perceived value
EquiTrend Aaker and
Jacobson (1994)
Baldauf et al.
(2003)
2. Market- based brand equity
Revenue
premium
The di erence in
revenue between a
branded good and a
private label good
Revenue premium as the measure of brand
equity re ects the change of brand value
over time
There is a strong link between consumer-
based brand equity and market
performance
Dominick’s
database
Marketing
FactBook
Ailawadi et al.
(2003)
Kartono and Rao
(2007)
Sales/Revenue Top- line performance New product introductions have strong
e ects on sales and  rm value Sales
promotion has an immediate positive e ect
on sales but a negative e ect on  rm value
J.D. Power
I/B/E/S
database
Pauwels et al.
(2004)
3. Market- based brand equity
Intangible asset Residual market value
after other tangible
sources of  rm value
are accounted for
Brand equity accounts for both the
revenue- enhancing and the cost- reducing
capabilities
Marketing factors such as brand assets are
valued by the  nancial community
CRSP
Compustat
National
Bureau of
Economic
Research
(NBER)
Simon and
Sullivan (1993)
Barth et al. (1998)
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170
Table 7.2 (continued)
De nition Empirical Findings Data Sources Illustrative Papers
Brand value Branded earnings,
which are based on
the brand strength,
are discounted to a
net present value and
aggregated to arrive
at a brand value
Strong brand delivers greater stock returns
and do so with less risk
Financial brand values have a positive
relationship to market- to- book ratios
Firms can su er a signi cant  rm value
decline due to depreciation of its brand-
name capital
Markets initially overreact negatively to
recall news, providing further support for
the depreciation of brand- name capital
e ect
Interbrand
Press releases
and articles
Dow Jones
Interactive
database
Kerin and
Sethuraman
(1998)
Madden et al.
(2006)
Mitchell (1989)
Govindaraj et al.
(2004)
Note: a. Data sources and illustrative papers for brand equity metrics are common across all sub- categories of these metrics and hence are
mentioned only once. We follow a similar reporting format in Tables 7.3, 7.4, and 7.5.
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Branding and  rm value 171
Research supports that the CBBE metrics of brand strength and brand
stature, all measured by Y&R’s BrandAsset Valuator model, are posi-
tively related to shareholder value (Pahud de Mortanges and Van Riel,
2003). Brand distinctiveness, which enables a  rm to communicate with
the stakeholders more e ciently and e ectively (Aaker, 2003), has a posi-
tive in uence on overall  nancial performance through growth rates in
sales, market share, and pro tability (Wong and Merrilees, 2008). Mizik
and Jacobson (2008) assess the  ve ‘pillars’ that form the updated Young
& Rubicam BrandAsset Valuator model (i.e., di erentiation, relevance,
esteem, knowledge, and energy) and  nd that the brand asset metrics
of perceived brand relevance and energy provide incremental informa-
tion to accounting measures in explaining stock returns. In contrast, the
stock return e ects of esteem and knowledge are re ected in current- term
accounting measures and in brand relevance and energy. In addition,
their  ndings suggest that  rms increasing brand di erentiation might
not receive abnormal returns contemporaneously but do so in subsequent
periods.
Brand attitude and brand name familiarity jointly in uence the stock
market in the context of brand extension announcements (Lane and
Jacobson, 1995). Aaker and Jacobson (2001) estimate a model that
assesses brand attitude in high- technology markets (e.g., Apple, Compaq,
and IBM) to provide incremental value relevance to stock market perform-
ance. Their study  nds that a change in brand attitude has a signi cant
in uence on stock return comparable to that of unanticipated returns on
equity. In other words, the  nancial markets perceive that brand attitude
a ects expectations of future- term performance beyond those re ected in
current- term earnings.
Turning to the CBBE metric of loyalty, Gupta et al. (2004)  nd that
a 1 percent improvement in customer retention increases  rm value
by 5 percent whereas 1 percent improvement in margin or acquisition
cost generates improvements of only 1 percent and 0.1 percent in  rm
value, respectively. This result is consistent with suggestions of customer
retention as the dominant theme in customer relationship management
(Baldauf et al., 2003; Thomas et al., 2004).
The CBBE metric of perceived quality has a positive impact on
brand pro tability, market share, customer perceived value, and stock
prices (Aaker and Jacobson, 1994; Baldauf et al., 2003). Frieder and
Subrahmanyam (2005), using brand perceptions data (i.e., brand famili-
arity and brand perceived quality) of 300 strong brands  nd that inves-
tors prefer to invest in  rms with high information  ows and are more
in uenced by brand visibility than by perceptions of brand quality. The
greater the familiarity with  rms, the more information investors can
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172 Handbook of marketing and  nance
have; hence, investors exhibit a propensity toward companies with highly
well- recognized brands. More recently, Bharadwaj et al. (2011) examine
the impact of changes in brand quality as measured by EquiTrend and
nd that such changes enhance shareholder wealth by improving stock
returns and reducing idiosyncratic risk. However, unanticipated changes
can also erode shareholder wealth as they have a positive association with
systematic risk.
As for the impact of CBBE on  rm risks, research suggests that CBBE
is negatively associated with both  rms’ debt- holder and equity- holder
risks (Rego et al., 2009). In particular, CBBE plays a more important role
in reducing idiosyncratic risk than systematic risk. Furthermore, high
CBBE can reduce down- side risk more e ciently than upside risk because
high CBBE  rms have more loyal and committed consumers, which
lowers the vulnerability of cash  ows, especially during times of economic
uncertainty. Results from this stream of research are summarized in Table
7.2. Our conclusion is that CBBE is positively related to  rm value and
negatively related to both idiosyncratic and systematic risk.
Market- based Brand Equity
Recently, a few studies have examined the link between CBBE and MBBE
models to demonstrate that customer mindset measures a ect the brand’s
performance in the market (e.g., Srinivasan et al., 2010). Ailawadi et al.
(2003) show that revenue premium as a measure of brand equity is not
only stable but re ects changes in brand value over time; they do not,
however, consider stock performance impact. Kim et al. (2003)  nd that
brands’ perceived quality, image, and loyalty are positively associated
with  rm revenues within the hotel industry. While a few studies examine
the market valuation impact of MBBE, focusing mostly on top- line per-
formance (e.g., Pauwels et al., 2004), more research is needed in this area
including, notably, an assessment of the impact of MBBEs on risk. Our
overall conclusion is that the MBBE is, on average, positively related to
rm value.
Financial- based Brand Equity
Barth et al. (1998)  nd that brand value estimates are signi cantly posi-
tively associated with advertising expense, brand operating margin, and
brand market share. Importantly, brand value estimates are signi cantly
positively related to share prices after controlling for recognized brand
assets and analysts’ earnings forecasts. Barth et al. provide compelling
evidence relating to the reliability of estimates of brand values based on
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Branding and  rm value 173
the methodology developed by Interbrand. Also using Interbrand’s esti-
mation of brand equity, Kerin and Sethuraman (1998)  nd that there is a
positive relationship between  nancial brand value and market- to- book
(M/B) ratio.
Madden et al. (2006) compare an ex ante portfolio of 111 companies’
brands that appeared on the Interbrand list of World’s Most Valuable
Brands at least once between 1994 and 2001 to a benchmark to explore
rm value creation through brands. They show that by investing in brand-
ing and cultivating strong brand assets, a company can create greater
shareholder value and do so with less risk. Mizik and Jacobson (2009)
show that by taking into account brand metrics that re ect accounting
variables (e.g., sales), the predictive power of  rm value is improved by
a signi cant 16 percent reduction in prediction error. Although there
exists ongoing and intense discussion about the admission of brands into
nancial statements in the accounting community (Lev and Sougiannis,
1996; Barth et al., 1998), there is little disagreement that brands operate as
intangible assets of a  rm.
Just as marketing resources can be deployed to build customer- and
market- based brand equity, so too can crisis events subject  nancial- based
brand equity to deterioration and decay. Crises such as product recalls,
ethical breaches,  rm misconduct, and unfortunate events that threaten
product or brand reputation can precipitate considerable drops in  rm
market value through reductions in  nancial- and market- based brand
equity indicators. Theory suggests that when the product quality of a
brand falls below the expected level, the value of the  rm’s brand- name
capital declines, and the price premium that consumers were willing to pay
for the brand is lost (Klein and Le er, 1981).
The Tylenol poisonings provide perhaps the most well- known brand
crisis example, in which seven people were killed as a result of ingesting
cyanide- laced capsules of the over- the- counter pain- killer drug. Mitchell
(1989) examines the Tylenol crisis to estimate the  nancial losses caused
by brand- name capital depreciation, and to understand the degree to
which a  rm’s brand name su ers a loss of value even when the  rm is
clearly not at fault. Mitchell concludes that Johnson & Johnson su ered a
signi cant $1.24 billion wealth decline (14 percent of the forecasted value
of the company) due to deprecation of its brand- name capital, thereby
supporting the link between  rm value and  nancial indicators of equity
in the brand.
The Ford Explorer- Firestone tire product recall provides a second test
of the link between  nancial- based brand equity metrics and  rm value, as
exposed through crisis events. Govindaraj et al. (2004) examine the stock
price e ects of events related to the Ford- Firestone product recall and
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174 Handbook of marketing and  nance
con rm that losses in market value far exceed tangible and direct costs
associated with the recall. They conclude that markets initially overreact
negatively to recall news, providing further support for the depreciation of
brand- name capital e ect.
Finally, Simon and Sullivan (1993) develop a technique for estimat-
ing a  rm’s nancial- based brand equity and demonstrate that their
measure responds appropriately to marketing events that enhance
customer- and market- based brand equity (i.e., the introduction of Diet
Coke and FDA approval of aspartame for use in soft drinks) or shift
demand to competitors overall (i.e., the introduction of New Coke).
This study demonstrates that investors do not ignore brand equity
factors;  nancial- based brand equity indicators are re ected in the stock
prices of  rms.
In summary, improvements (deterioration) in FBBE have a signi -
cant and positive (negative) impact on  rm valuation and, although less
studied, improvements in FBBE can also serve to reduce  rm risk. While
these results are well- documented, research has yet to investigate the
mechanisms driving these e ects.
CORPORATE BRAND STRATEGY
Branding can create value not just for products and services, but also
for corporations, and organization- level brand strategies are important
to the  nancial performance of the  rm. We consider research on the
e ects of four classes of corporate brand strategy, as shown in Figure
7.1, and summarize key  ndings in Table 7.3. First, is the link between
corporate naming strategies and  rm value, whereby the signals con-
veyed in a name change can increase brand awareness and preference
and drive value creation for the  rm. Second, we explore how corporate
mergers and acquisitions can enhance  rm value by positively in uencing
the diversity of the brand portfolio (discussed in more detail below) and
by creating synergistic e ects of the acquirer’s marketing capabilities in
building brand equity. Third, we examine research on how the internal
organizational culture can drive brand equity and hence increase  rm
value, paying attention to the branding mindset and branding capabili-
ties of the  rm. Finally, investments in corporate social responsibility,
which have been shown to be related to  rm value, can build strong
brands by positively in uencing brand evaluations, brand choice, and
brand recommendations (Klein and Dawar, 2004), thereby enhancing
rm value overall.
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175
Table 7.3 Summary of key  ndings on the impact of corporate brand strategy on  rm value
Classes of
Corporate Brand
Strategy
Illustrative
Metrics
Empirical Findings Data Sources Illustrative
Papers
1. Corporate
naming
strategy
Announcement
of corporate
name change
Findings from the literature are mixed:
No statistically signi cant stock price reactions associated
with corporate name change events
A positive impact of name change on stock price only when
the name change signals a change in corporate image
The positive e ect of name change announcements on
abnormal stock returns is heightened when the change is
accompanied by strategic investment support
The positive overall e ect of corporate name changes on
stock prices is stronger for industrial versus consumer
rms, risky versus low- risk  rms, and poorly performing
versus well- performing  rms
Companies that change their name to a ‘dotcom’ name
earn signi cant cumulative abnormal returns from 1998
to 1999. After the burst of the Internet bubble (mid- 2000),
companies that deleted ‘.com’ from their corporate names
produce cumulative abnormal returns
Press releases
and articles
SEC  ling
Hoover
Datastream
International
Horsky and
Swyngedouw
(1987)
Cooper et al.
(2001)
Cooper et al.
(2005)
Howe (1982)
Karpo and
Rankine
(1994)
Bosch and
Hirschey
(1989)
DeFanti (2006)
Lee (2001)
2. Mergers &
acquisitions
(M&A)
Announcement
of M&A
Acquirer and target characteristics (i.e., marketing
capability and brand portfolio diversity) a ect a target’s
brand value positively
The positive impact of an acquirer’s brand portfolio
diversity and the positive e ect of a target’s marketing
capability on a target’s brand value are lower when the
acquisition is synergistic
SEC  ling
SDC Platinum
Advertising
Age
NBER
USPTO
Bahadir et al.
(2008)
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176
Table 7.3 (continued)
Classes of
Corporate Brand
Strategy
Illustrative
Metrics
Empirical Findings Data Sources Illustrative
Papers
3. Brand
orientation
and brand
management
capability
Employee
mindset
Brand thrust
Brand
management
e ectiveness
Brand
management
e ciency
Brand orientation positively a ects brand performance,
and in turn, leads to high  nancial performance
Brand orientation has an indirect in uence on brand
performance through brand distinctiveness and
innovation
Companies with a strong brand thrust, compared to
competitors, generate up to a 3% higher shareholder
return
Brand management capabilities are related to
shareholder value performance, from both an accounting
cash  ow and stock market perspective
Questionnaire
design
Thomson
Financial
Extel
Wong and
merrilees
(2008)
Ohnemus and
Jenster (2007)
Morgan et al.
(2009)
4. Corporate
social
responsibility
(CSR)
Corporate
social
performance
(CSP)
Firms that are viewed more favorably for CSR initiatives
enjoy higher market value
CSP helps reduce  rm idiosyncratic risk. Advertising and
R&D play a moderating role in the impact of CSP on  rm
idiosyncratic risk
The simultaneous pursuit of CSP, advertising, and R&D
is harmful with increased idiosyncratic risk
Fortune’s
MAC (Most
Admired
Companies)
Luo and
Bhattacharya
(2006)
Luo and
Bhattacharya
(2009)
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Branding and  rm value 177
Corporate Naming Strategy and Firm Value
A common approach to understanding how corporate naming strat-
egy a ects rm value is to examine announcements of corporate name
changes, and apply the event study methodology from modern  nance
theory to quantify stock price e ects. These studies use a market signal-
ing perspective that recognizes that a  rm’s name is infused with meaning
and reputation, thereby providing information that drives brand image
and equity perceptions among investors. Horsky and Swyngedouw (1987)
provide general support for the signaling theory approach as applied to
name changes. While the  nancial popular press has long argued that
corporate name changes result in permanent value creation for  rms
(Emshwiller, 1999; Wing eld, 1999), empirical results on the e ects of
corporate name change on  rm value have been mixed.
Several researchers provide evidence that changes in corporate naming
have an immediate and signi cantly positive impact on the  rm’s stock
price. Horsky and Swyngedouw (1987) report a statistically positive overall
e ect of corporate name changes on stock prices, with e ects stronger for
industrial versus consumer  rms, risky versus low- risk  rms, and poorly
performing versus well- performing  rms. Several researchers examine one
particular form of corporate name change: companies that add or delete
‘.com’ or the word ‘Internet’ to and from their names. Cooper et al. (2001)
document what they call ‘a strikingly positive dotcom e ect’ (p. 2371) for
dot.com name changes, with cumulative abnormal returns on the order
of 74 percent for the ten days surrounding the announcement and no evi-
dence of post- announcement negative drift. Cooper et al. (2005) explore
corporate naming decisions after the burst of the Internet bubble and
support that the stock prices for companies that deleted ‘.com’ from their
corporate names after mid- 2000 experienced statistically signi cant posi-
tive abnormal stock returns as high as 12.6 percent. Lee (2001) examines
dot.com name changes that are purely cosmetic versus those that signal
deeper strategic investments. Positive e ects on abnormal stock returns
and trading volume are found for name change announcements, the e ect
heightened when the change is accompanied by investment support.
Using various samples and announcement windows, others  nd no sta-
tistically signi cant stock price reactions associated with corporate name
change events (e.g., Howe, 1982; Karpo and Rankine, 1994). Bosch and
Hirschey (1989) expose a positive pre- announcement e ect, but this is fol-
lowed by negative post- announcement drift that cancels out the e ect. To
negotiate these mixed  ndings, DeFanti and Busch (2009) explore brand
equity moderators of the name change e ect. Two types of name changes
are considered, each sending di erent brand signals: (1) name changes
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178 Handbook of marketing and  nance
that re ect a repositioning or substantive change in corporate image, and
(2) name changes that provide news of a change in the corporate entity
(e.g., acquisitions, changes in ownership). The magnitude of change in the
name was also considered: in major changes (e.g., Anderson Consulting
to Accenture), the new corporate name is not immediately recognizable as
related to the previous corporate name whereas with a minor change (e.g.,
US Airways to US Air), the new corporate name is highly similar to the
previous one. Findings show a positive impact of name change on stock
price only when the name change is major and signals a change in corpo-
rate image. These  ndings contrast with Horsky and Swyngedouw (1987)
who found statistically insigni cant di erences for major versus minor
name changes. Kashmiri and Mahajan (2009) similarly explore modera-
tors of the shareholder value impact of corporate name changes. They  nd
positive e ects when the name change signals a meaningful future change
in marketing strategy rather than a retroactive re- alignment, and when the
rm has a CMO on the management team.
Overall,  ndings suggest a contingency view of the e ects of corpo-
rate brand naming strategies on  rm value, with strong positive impact
only when the change is supported with su cient brand investments and
backed by management capabilities, and when the name signals a relevant
future shift in market strategy or repositioning of the brand.
Mergers, Acquisitions, and Firm Value
Brands are critical assets in mergers and acquisitions (M&As) and their
cash  ow expectations can drive signi cant price premiums from acquir-
ing  rms. The M&A setting is also useful for understanding brand equity
e ects on  rm value: as of 2001, the Securities & Exchange Commission
(SEC) requires the reporting of intangible brand assets in M&A transac-
tions, thus granting a  nance- based indicator of brand equity value to the
rm.
Research by Bahadir et al. (2008) explores the factors that drive brand
value (as measured by estimates of the dollar value the acquirer attached
to the target  rms’ brands in the M&A transaction) and hence share-
holder value in the context of M&A. Studying 133 M&A transactions
among US- based public  rms from 2001 to 2005, and considering both
the characteristics of the target brand and the less- considered acquirer’s
perspective on brand value, the authors  nd that the brand marketing
capabilities of both the acquirer and target companies (i.e., the ability to
combine e ciently several marketing resources to engage in productive
activity and attain marketing objectives) have positive e ects on the target
rm’s brand value. Marketing- competent acquirers leverage the target’s
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Branding and  rm value 179
brands more e ectively by spending more e ciently to achieve revenue
objectives, extending the target’s brands more e ectively to new markets,
and by better withstanding competitive pressures from other brands,
thereby improving cash  ows. Further, the brand portfolio diversity of the
acquirer (i.e., the degree to which a  rm chooses to serve di erent markets
with di erent brands) has positive e ects on the target  rm’s brand value:
an acquirer  rm with high diversity can keep more of the target’s brands
active after the acquisition, whereas new brands are likely divested in low
diversity  rms. Observed positive e ects are attenuated in situations where
the M&A creates redundancies among acquirer and target brand portfo-
lios and marketing capabilities, thereby dampening cash  ow expectations
and cannibalizing cash  ows.
Overall, M&As create shareholder value only when they enhance
the diversity of acquirer brand portfolios and strengthen the target’s
marketing capabilities through non- redundant capabilities and skills.
Brand Orientation, Brand Management Capability, and Firm Value
The organization’s branding environment can a ect management’s ability
to develop and leverage brand assets, thereby increasing  rm value by
enhancing cash  ows, encouraging greater levels of growth in cash  ows,
or reducing the volatility of cash  ows. Aspects of this relationship have
been investigated using two di erent organization- level constructs: (1)
a brand- supportive organizational culture and (2) the capabilities of
managers in their brand stewardship roles.
Wong and Merrilees (2008) investigate this issue by exploring whether
being ‘brand- oriented’ a ects brand strength (measured by brand di eren-
tiation), brand performance (indicated by brand awareness and loyalty),
and  nancial performance (indicated in market share and the growth rate
of sales). Brand orientation is ‘a mindset that recognizes that the brand
will be recognized, featured, and favored in strategy’ (ibid., p. 374); it guar-
antees the brand as a corporate focus starting point in the formulation
of corporate strategy (Mosmans and van der Vorst, 1998). Using survey
methodology and structural equation modeling to test hypothesized
e ects, Wong and Merrilees  nd that brand orientation positively a ects
brand performance, which, in turn, leads to high  nancial performance.
Brand orientation also exerts an indirect in uence on brand performance
through brand di erentiation e ects.
Ohnemus and Jenster (2007) also examine a  rm’s orientation to brand-
ing, but use a resource- based  nancial indicator of this commitment rather
than measures of management attitudes and beliefs. The study posits
a positive relationship between ‘brand thrust,’ the amount of  nancial
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180 Handbook of marketing and  nance
resources a company allocates over time to build and maintain its brand
(as measured in terms of sta overheads, distribution expenditures, and
marketing/advertising expenditures) and the company’s  nancial perform-
ance (as measured by return on assets). Based on a sample of 2158 compa-
nies within 113 di erent industries, companies with a strong brand thrust,
compared to competitors, generate up to a 3 percent higher shareholder
return.
Morgan et al. (2009) add to our understanding of how brands enhance
nancial performance by exploring the capabilities of managers in build-
ing and leveraging brand assets. Drawing on dynamic capabilities theory
and the resource- based view, the authors consider two aspects of brand
management capability: (1) brand management e ectiveness, the  rm’s
ability to create desired brand equity outputs and (2) brand management
e ciency, the rm’s resources consumed in achieving realizing brand
equity outputs. Using a sample of 1000 brands for the years 2000 through
2009,  ndings indicate that brand management capabilities are related to
shareholder value performance, from both an accounting cash  ow and
stock market perspective, as measured by Tobin’s Q.
In summary, a high- performing, brand- supportive culture drives  rm
value through e ective and e cient management of brands.
Corporate Social Responsibility (CSR) and Firm Value
CSR has been positively linked to multiple indicators of brand equity.
Recent research supports a positive relationship between a company’s
CSR actions and consumers’ attitudes toward that company and its prod-
ucts (Brown and Dacin, 1997; Creyer and Ross, 1997; Ellen et al., 2006),
enhancing the customer- based measure of brand equity. Similarly, CSR
e orts enhance market- based brand equity since consumers are more
willing to consume from a company after exposure to information about
its CSR e orts (Brown and Dacin, 1997; Murray and Vogel, 1997). Based
on comprehensive historical data, Luo and Bhattacharya (2006) show that
rms that are viewed more favorably for their CSR initiatives enjoy higher
market value. Furthermore, the  rm’s customer satisfaction level at least
partially mediates the in uence of CSR on market value. An explanation
is that the positive ‘moral capital’ that results from CSR could directly
a ect market value by improving employee morale and productivity. In
addition, by creating public goodwill, CSR provides an ‘insurance- like’
protection for shareholder wealth. Luo and Bhattacharya (ibid.) also  nd
that CSR helps reduce the  rm’s idiosyncratic risk. In addition, the simul-
taneous pursuit of corporate social performance, advertising, and R&D
leads to increased  rm idiosyncratic risk.
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Branding and  rm value 181
Overall, investments in CSR are positively related to brand equity and
to  rm value, and to  rm idiosyncratic risk.
BRANDING STRATEGY
Brand strategy provides the long- term plan for the systematic develop-
ment of brand equity to enable the attainment of brand objectives and
thereby increase shareholder value. In this section, we consider  ve ‘big
picture’ strategic mechanisms designed to enhance brand performance
and drive  rm value, as identi ed in Figure 7.1: trademark and licensing
strategy, brand extension strategy, brand alliances, brand portfolio strat-
egy, and brand crisis management. Results from this collection of research
papers are summarized in Table 7.4.
Trademarks and Firm Value
Trademarks are important intellectual property assets that play a sig-
ni cant role in company valuation (Berman, 2002). A trademark is ‘any
word, name, symbol, device or combination thereof that is adopted and
used by a manufacturer or merchant to identify goods and distinguish
them from those manufactured or sold by others’ (Lanham Act, 15 U.S.C.
1127 1982). Trademark strategy provides the unique identifying iconogra-
phy and symbol system that will be used on the public face of the brand.
Through trademarking, a company obtains legally supported brand pro-
tection and demonstrates that an o ering is uniquely theirs. Trademarks
help create equity by establishing brand di erentiation and helping
consumers avoid confusion in the marketplace, by making it easier for a
rm to create and build reputational capital, and by providing a basis for
brand extensions. Trademarks are  ercely policed and managed in light of
their value- creating roles. Research has shown that brand equity is diluted
through counterfeiting and trademark infringement, thus supporting the
value- creating functions that trademarks serve (Morrin et al., 2006).
Krasnikov et al. (2009) consider two types of trademarks and their
e ects on shareholder value. First are brand- identifying trademarks in the
form of the brand’s name (McDonald’s), logo, and symbols (the Golden
Arches). Identifying trademarks create value by enabling brand awareness
and recognition (Henderson and Cote, 1998) and by serving as signals of
likely product performance (Erdem and Swait, 1998). A second category
of trademarks seeks to establish meaning- laden associations rather than
simply facilitate brand identi cation, as, for example, with brand slogans
(e.g., ‘Staples: That was Easy’) and brand characters or icons (e.g., the
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182
Table 7.4 Summary of key  ndings on the impact of branding strategy on  rm value
Classes of
Branding
Strategy
Illustrative Metrics Empirical Findings Data Sources Illustrative Papers
1. Trademarks Brand-
identi cation
trademarks
Brand- association
trademarks
Brand association trademarks create value by a ecting
brand attitudes
Brand’s protected names and symbols drive  rm
value through both the awareness- enhancing brand
identi cation and meaning- laden brand association routes
USPTO’s
Trademark
Electronic
Search
System
(TESS)
Krasnikov et al.
(2009)
Henderson and
Cote (1998)
The brand association trademarks available to a  rm
enhance cash  ow, Tobin’s Q, ROA, and stock returns while
reducing cash  ow variability
Firm’s
annual
reports
Keller (1993)
2. Brand
extensions
Brand
extension
announcement
Stock market reactions are most positive when
extensions are of brands that either rate high on familiarity
and attitude or rate low on both familiarity and attitude
Prestige niche brands that are high on esteem attitudes butlow on
familiarity experience negative excess returns through extension
Landor
Image Power
Survey
Lane and
Jacobson (1995)
3. Brand
licensing
Brand license
agreements
Strong brands emphasizing brand protection over revenue
generation in establishing license contracts have a negative
association with royalty rates and hence  nancial performance
RoyaltyStat
SEC  ling
Jayachandran
et al. (2009)
Licensing generates higher stock return to investors only
when licensed brands have a better  t with the brand concept
Press releases
and articles
Barbulescu
et al. (2008)
4. Brand
alliances
Announcement
of celebrity
endorsement
contracts
Celebrity
endorser event
Market quickly reacts positively to announcements of
celebrity endorsement contracts in advertising
In the short term, a brand’s alliance with an athlete
endorser leads to positive e ects on sales and  rm value.
On average,  rms announcing contracts with celebrities
experienced a gain of 0.44% in excess returns
Press releases
and articles
LexisNexis
Agrawal and
Kamakura
(1995)
Elberse and
Verleun
(2010)
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183
Brand alliances with athlete endorser leads to the
positive e ects on brand ally’s equity, which in turn leads to
further gains in sales and stock returns
In the long run, reputation- enhancing performances by
the allied brand lead to further gains in sales and stock returns,
albeit at a decreasing rate
A  rm’s stock market performance is negatively related
to celebrity endorsers’ blameworthiness when they are involved
in undesirable events
Celebrity scandals send negative market- wide signals
about the reputation risk associated with a celebrity brand
Louie et al.
(2001)
Knittel and
Stango (2010)
5. Brand
portfolio
strategy
Portfolio
characteristics
(number of brands
the  rm owns and
markets; number
of segments;
intraportfolio
competition)
Continuum of
brand portfolio
strategy
Brand acquisition
and disposal
announcement
A  rm’s portfolio strategy explains 2–21% of the variance
in nancial performance and 8–16% of the variance in the
marketing e ectiveness and e ciency
Owning a large number of brands reduces cash  ow
variability and has higher Tobin’s Q
Scope of market coverage is associated with greater cash
ow variability and lower levels of Tobin’s Q
Inter- brand competition within the portfolio is unrelated to
the rm’s cash  ow performance but drives lower Tobin’s Q
A branded house strategy delivers the greatest shareholder
returns. Sub- branding outperforms all other strategies in terms
of returns, but at the highest levels of risk. Endorsed branding
strategies are e ective risk control mechanisms
The hybrid strategy is a poor performer with the lowest
returns at moderate risk
There is a positive response to the pruning of portfolio brands
Investors reward brand acquisitions when the buying  rm
has strong marketing capabilities and gains synergy
American
Customer
Satisfaction
Index (ACSI)
Hoover
Firm’s website
Firm’s annual
reports
Datamonitor
Nielsen
LexisNexis
Press releases
and articles
Morgan and
Rego (2009)
Rao et al. (2004)
Hsu et al. (2010)
Wiles et al.
(2009)
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184 Handbook of marketing and  nance
Energizer Bunny). Brand association trademarks create value by a ect-
ing brand attitudes and shaping brand knowledge (Keller, 1993). By
examining 22 060 trademark registrations among 108  rms, Krasnikov
et al. (2009) demonstrate that the brand’s protected names and symbols
drive  rm value through both the awareness- enhancing brand identi ca-
tion and meaning- laden brand association routes. The stock of brand
association trademarks available to a  rm enhances cash  ow, Tobin’s Q,
return on assets (ROA), and stock returns while reducing cash  ow vari-
ability. Brand identi cation trademarks exert indirect e ects by increasing
awareness and enhancing the cash  ows generated by brand association
trademarks. However, increasing consumer awareness through brand
identi cation trademarks diminishes the positive e ects of brand associa-
tion trademarks on Tobin’s Q and stock returns. The authors speculate
that this e ect is due to the attraction of less- informed individuals versus
institutional investors, which is known to reduce stock returns.
Overall, trademarks can create  rm value by driving customer- based
brand equity metrics and enhancing cash  ow e ects.
Brand Extensions and Firm Value
The asset- based view of branding emphasizes that incremental  rm value
can be generated by developing a strong brand that can be extended into
new product categories, new markets, or across geographic lines. In brand
leveraging, an established brand name is attached to a new product in an
attempt to tap into consumers’ favorable brand associations and thereby
create incremental value at lower risk and cost. Extensions o er a number
of advantages that not only facilitate market acceptance of the new o er-
ing in a competitive environment, but also enhance customer- based brand
equity by generating positive feedback e ects to the company and the
brand. In terms of consumer reception, brand extensions can bene t from
high awareness of the parent brand, transfer of positive a ect from the
parent, improved brand image halos from the parent brand, and reduced
risk perceptions from the transfer of parent brand quality judgments, all
of which drive trial and increase brand sales (Boush et al., 1987; Aaker
and Keller, 1990; Sullivan, 1990; Bottomley and Holden, 2001). Brand
extensions can also improve the image of the parent brand through reverse
feedback e ects and clarify or augment brand meaning (Keller and Aaker,
1992), thus supporting a virtuous value creation cycle. Brand extensions
can also gain market- based equity advantages in the form of increased
probability of distribution, sales, and share among new customers through
increased market coverage, and improved cash  ows from reduced costs
of advertising and marketing programs and increased e ciencies in mar-
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Branding and  rm value 185
keting spend (Smith and Park, 1992; Aaker, 1996). Still, brand leverage
e ects are not systematically positive: extensions with poor  t or poor
quality can lead to image dilution and cannibalization (Aaker and Keller,
1990; Sullivan, 1990; Loken and John, 1993) and the inferences generated
by certain parent brand associations can create negative brand extension
attitudes overall (Bridges et al., 2000). Further, extensions may restrict
nancial equity by precluding opportunities provided only through a new
and unconnected branded o ering, thereby constraining value creation in
the  rm (Aaker, 1990). Research suggests that brands can bene t or su er
from extensions depending on the conditions and tradeo s they engage.
Lane and Jacobson (1995) apply event study methodology to explore
the  nancial impact of 89 brand extension announcements and, speci -
cally, whether stock market responses depend upon customer- based brand
equity indicators of familiarity with and attitude towards the extension
brand. Empirical results indicate that investors sometimes expect the neg-
ative consequences of leverage decisions to o set expected gains, thereby
justifying concerns about potential negative long- run repercussions from
extensions (Sullivan, 1990; Loken and John, 1993). Stock market returns
depend interactively and non- monotonically on brand attitude (as meas-
ured by Y&R’s esteem construct) and familiarity (as indicated by share
of mind). Stock market reactions are most positive when extensions are
of brands that either rate high on familiarity and attitude (e.g., Coca-
Cola) or rate low on both familiarity and attitude (e.g., Yuban), the latter
class comprising brands that have everything to gain but nothing to lose.
Prestige niche brands high on esteem attitudes but low on familiarity
experience negative excess returns through extension. These brands have
signi cant restrictions on expansion potential that derives from an aura of
exclusivity that extensions threaten to dilute.
Overall, the e ects of brand extensions on  rm value are complex, with
e ects contingent on qualities of the extensions and their parent brands.
Licensing and Firm Value
As brands become widely recognized, they can also create  rm value
through the generation of licensing revenue. In licensing, a trademark
holder (the licensor) grants permission to a third party (the licensee) to use
the  rm’s trademarks in association with the licensee’s products/services
for speci ed purposes and for a de ned period of time in exchange for a
royalty or licensing fee (Raugust, 2008). The legally binding license agree-
ment not only generates incremental revenue streams but also protects
the brand from misappropriation, thereby reducing risk. Srivastava et al.
(1999) suggest that strong brands should generate higher royalty rates and
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186 Handbook of marketing and  nance
hence  rm value because they allow licensees to build stronger businesses.
Jayachandran (2009)  nd, interestingly, that strong brands emphasize
brand protection over revenue generation in establishing license contracts,
such that brand strength has a negative association with royalty rates and
hence  nancial performance.
Agency theory also suggests that licensing may reduce  rm perform-
ance through the mechanism of increased brand dilution risks. License
agreements are agency relationships wherein goals and risks preferences of
licensees and licensors may not be aligned. Whereas the licensor is inter-
ested in protecting the equity of a strong brand, the licensee may enter the
agreement to generate short- term revenues through brand exploitation
(Quelch, 1985). In the license setting, the management, production, and
marketing of the licensed extension are outside the  rm’s direct steward-
ship and control, which can adversely a ect consumers’ brand attitudes
and diminish brand equity and negatively a ect sales of all products
carrying the brand name.
Using an event study method, Barbulescu et al. (2008) investigate the
e ects of brand license announcements on the licensor’s abnormal stock
returns and  nd that although licensing generates a signi cant stock
return to investors, a notable proportion of announcements have negative
e ects on returns. In line with theories explaining successes in brand exten-
sions, stock returns are higher only when licensed brands have a better  t
with the brand concept, are leveraged across a large number of product
categories at the brand bene t level (i.e., brand breadth), and create syner-
gies in market spend, thereby lowering brand advertising investments.
Overall, results support a license–shareholder value linkage, with e ects
determined by the quality and  t of the licensed brand.
Brand Alliances and Firm Value
A brand alliance is a short- or long- term association between two or more
individual brands that is engaged in the hope that the brand equity of the
linked entity is increased by virtue of the a liation, wherein the whole is
greater than the sum of the parts (Rao and Ruekert, 1994). Brand alli-
ances can strengthen brand equity by two central routes: (1) they create
meaningful ‘secondary brand associations’ (Keller, 1993) that are trans-
ferred between partner brands and enhance brand attitudes (Kamins et
al., 1989), brand preferences (Kahle and Homer, 1985; Kamins et al.,
1989; Ohanian, 1991; Heath et al., 1994) and brand associations (Rao and
Ruekert, 1994; Park et al., 1996; Washburn et al., 2004) directly, and (2)
they enhance the value of advertising expenditures and marketing invest-
ments by positively in uencing brand awareness (Petty et al., 1983) and
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Branding and  rm value 187
hence the  rm’s working capital needs (Srivastava et al., 1998). The use
of alliances constitutes a signi cant investment in intangible brand assets
(Agrawal and Kamakura, 1995). Thus, brand alliances have potential to
in uence brand equity through the three routes outlined in Figure 7.1.
The shareholder payo of investments in one form of brand alliance
– those involving celebrity endorsers – has received particular research
attention. Using an event study methodology to examine 110 celebrity
endorsement contracts, Agrawal and Kamakura (1995) demonstrate that
a  rm’s stock market valuation increases when it signs celebrity endors-
ers, suggesting that investors view celebrity endorsement contracts as
worthwhile advertising investments. Elberse and Verleun (2010) focus on
alliances between professional sports athletes and consumer goods compa-
nies and probe deeper to explore intermediate market- based e ects on  rm
sales. They  nd that in the short term, a brand’s alliance with an athlete
endorser leads to positive e ects on sales and  rm value, as measured in
terms of stock returns. In the long run, reputation- enhancing perform-
ances by the allied brand maximize the likelihood of further positive news
regarding the brand ally’s equity, which leads to further gains in sales and
stock returns, albeit at a decreasing rate. Alliances with strong athlete
brands generate the largest gains in revenues and stock returns, further
supporting the mediating role of customer- based indicators of brand
equity on performance results.
Some studies expressly recognize that the awareness and association
e ects generated by celebrity a liation are not uniformly positive, and
that celebrities can become involved in reputation- damaging scandals as
well as performance- enhancing events (Janiszewski and Van Osselaer,
2000; Washburn et al., 2004). Louie et al. (2001) demonstrate how nega-
tive events involving endorsers of high- quality products can negatively
impact  rm valuation. Knittel and Stango (2010) analyze the Tiger Woods
scandal to link celebrity endorsements not just to stock market e ects but
also  rm risk. They  nd that  rms with products endorsed by Woods suf-
fered signi cant declines in stock market value, relative to both the entire
stock market and to a set of competitor  rms. Some sponsors’ losses were
competitors’ gains, suggesting that celebrity endorsement deals are at
least partially a business- stealing strategy. Results also show that negative
e ects are particularly strong among  rms who are endorsement intensive.
Overall, scandals send negative market- wide signals about the reputation
risk associated with celebrity brands.
In summary, the research supports that while brand alliances and celeb-
rity endorsements can positively drive brand equity in the short run and
rm value in the long run, scandals and other negative- quality signals can
have negative e ects.
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188 Handbook of marketing and  nance
Brand Portfolio Strategy and Firm Value
Most large  rms go to market with not one brand but many, and brand
portfolio strategies help organize and guide resource allocation for the
company’s collection of products and brands (Aaker, 2004). The brand
portfolio strategy speci es the structure of the brand portfolio and the
scope, roles, and interrelationships among portfolio brands. Brand port-
folios di er in terms of their design and complexity: breadth concerns the
number and nature of di erent products and brands linked to a  rm’s
o erings; depth concerns how short or long the product line is for a
given o ering (Keller, 2007). Portfolios also di er in the degree to which
branded o erings are uni ed through a linkage with common brand
names, logos, or symbols. In the branded house, an umbrella corporate
brand applies for all brands and products, while in a house of brands, a
collection of stand- alone, independent brands is in play. Brand portfolio
strategy fundamentally a ects a  rm’s nancial performance by in u-
encing the ability to compete and garner sales, distribution, and market
share; by allowing manufacturing and distribution scale economies; and
by a ording e ciencies in marketing and advertising spend. Portfolio
strategy a ects the brand positioning and marketing investment for each
branded o ering, thereby driving customer- based brand equity metrics
such as awareness, associations, attitudes and behaviors. As companies
grow, portfolio management becomes yet more critical as expanded port-
folios are streamlined through brand deletion and product line pruning
plays a critical role (Kumar, 2003). Despite the criticality of brand port-
folio strategy to  rm performance, di erent theories- in- use guide manage-
ment decisions (Hill et al., 2005) and the e ectiveness of di erent design
characteristics remains unclear.
To address this gap, Morgan and Rego (2009) analyze  rm value crea-
tion as a function of three central portfolio characteristics: the number
of brands the  rm owns and markets, the scope of market coverage or
number of segments in which brands are marketed, and the degree to
which the brands in the portfolio compete with each other by being simi-
larly positioned or directed to the same consumer targets. They  nd that a
rm’s portfolio strategy is a signi cant predictor of  nancial and market-
ing performance, with strategy explaining 2–21 percent of the variance in
nancial performance and 8–16 percent of the variance in the marketing
e ectiveness and e ciency. Exactly how portfolio characteristics a ect
returns is complex, however, with di erent characteristics driving direc-
tionally di erent e ects through di erent intermediary routes. Findings
suggest that owning a large number of brands is positively associated with
customer- based loyalty, reduced cash  ow variability, and higher Tobin’s
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Branding and  rm value 189
Q, but also higher sales, general, and administrative (SG&A) expenditures
and lower market share. Scope of market coverage is associated with lower
advertising and SG&A expenditures and higher market share, but greater
cash  ow variability, and lower levels of Tobin’s Q, cash  ow, and loyalty.
Competition within the portfolio lowers relative SG&A and advertising
expenses, is unrelated to the  rm’s cash  ow performance, and drives
lower loyalty and Tobin’s Q. From a marketing performance standpoint,
the research suggests that a greater number of brands marketed across a
smaller number of segments, with a low level of inter- brand competition
drives loyalty; the opposite pattern drives increased market share. The
research supports that the ideal portfolio structure depends on the market
or  nancial result desired by the  rm.
Rao and colleagues (2004) examine three di erent brand portfolio
strategies that di er in their supply- and demand- side advantages/disad-
vantages and  nd di erential e ects on Tobin’s Q. A branded house strat-
egy in which all o erings share a common corporate brand designation
delivers the greatest shareholder returns. This strategy bene ts from sig-
ni cant supply- side advantages in terms of economies of scale in market-
ing, lower costs of advertising/promotion, lower costs of creating brand
equity, and lower costs of new product introductions that accelerate and
enhance cash  ows; demand- side advantages from easier brand exten-
sions also accrue. Findings regarding underperformance among house
of brands strategists lead these researchers to speculate that the markets
‘do not value the house of brands strategy appropriately’ and might
‘underestimate the potential bene ts of a di erentiated brand approach
for diverse target segments and products.’ Further, they hypothesize,
markets ‘under- appreciate that a house- of- brands strategy distributes risk
over more brands, thereby improving the  rm’s nancial pro le overall’
(p. 139).
Hsu et al. (2010) extend Rao et al.’s (2004) analysis by considering a
continuum of  ve portfolio strategies (branded house, sub- branding,
hybrid, endorsed branding, and house of brands) and including e ects
on risk as well as returns. They  nd that sub- branding (e.g., Apple iPod,
BMW 7- series) outperforms all other strategies in terms of returns, but
generates the highest levels of risk. Strategies that create distance from
the corporate entity (endorsed branding) are e ective risk control mecha-
nisms, while strategies that create separation (house of brands) lower
systematic but not idiosyncratic risk. In contrast to the logic of  nancial
portfolio theory that seeks risk management through diversi cation, the
hybrid strategy is a poor performer with the lowest returns at moderate
risk.
Wiles et al. (2009) examine how the acquisition or deletion of brands
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190 Handbook of marketing and  nance
in the portfolio a ects a  rm’s stock performance. Their event study
of stock market reactions to 232 brand acquisition and 163 disposal
announcements in the consumer packaged goods industry suggests a
positive response to the pruning of portfolio brands, but no evidence of
abnormal returns for brand acquisitions. Stock performance is a ected
by several characteristics of the disposed brands: non- core business
brands, larger brands, and brands for which the sale price is greater than
anticipated generate  rm value rewards. The authors  nd some evidence
that investors may reward brand acquisitions under certain conditions,
such as when the buying  rm has strong marketing capabilities, when the
brand acquisition is in a market segment adjacent to the  rm’s current
business, or when the acquired brand brings new distribution resources
to the  rm.
This research collectively supports that strategic decisions regarding a
rm’s brand portfolio a ect a  rm’s marketing and  nancial performance
in complex ways.
BRAND- BUILDING TOOLS: DRIVERS OF STRONG
BRANDS AND FIRM VALUE
Arguably the most important issue facing managers is how to build and
maintain strong brands. Managers can build strong brands by investing
in marketing programs targeting current or potential customers. We con-
sider links between investments in advertising and promotions to brand
equity and to  rm value, as shown in Figure 7.1, and summarize key  nd-
ings in Table 7.5.
Advertising, Brand Equity, and Firm Value
Advertising can in uence brand equity through the three routes outlined
in Figure 7.1. First, it enhances the customer- based indicators of brand
equity, essentially moving the consumer forward through a hierarchical
sequence of events, including cognition (e.g., awareness, knowledge),
a ect (e.g., liking, desire) and, ultimately, behavior (purchase and
loyalty) as argued by Vakratsas and Ambler (1999). Second, advertis-
ing can boost market- based indicators of brand equity by di erentiating
brands, which can then be leveraged to extract superior product market
performance Finally, advertising can serve to build  nancial- based
indicators of brand equity by building intangible asset value (Joshi and
Hanssens, 2009).
Research has shown that a  rm’s advertising directly a ects stock
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191
Table 7.5 Summary of key  ndings on the impact of the drivers of strong brands on  rm value
Drivers of
Strong Brands
Illustrative Metrics Empirical Findings Data Sources Illustrative Papers
1. Advertising Advertising
dollars
(e.g., Compustat)
Advertising
dollars (e.g., TNS
Media)
Advertising directly a ects stock returns over
and above the indirect e ect of advertising
through lifting sales revenues and pro ts.
Advertising will have a direct e ect on  rm
value through two mechanisms: spillover
and signaling
Investors, cognizant of the bene ts of
increased advertising through enhanced
brand equity, may look beyond a  rm’s
current cash  ows and translate the
long- term e ects of advertising into  rm
valuation
Advertising may act as a signal of the  rm’s
nancial well- being or competitive viability
Firms that raise signi cant amounts of equity
capital increase their advertising signi cantly
more than  rms with higher  nancial leverage
(i.e., higher levels of debt relative to equity
capital)
Compustat
TNS Media
IMS
Frieder and
Subrahmanyam
(2005)
Grullon et al. (2004)
Joshi and Hanssens
(2009)
Barth et al. (1998)
Luo and Donthu
(2006)
Mathur et al. (1997)
Gi ord (1997)
Grullon et al. (2006)
McAlister et al.
(2007)
Osinga et al. (2011)
Srinivasan et al.
(2009)
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192
Table 7.5 (continued)
Drivers of
Strong Brands
Illustrative Metrics Empirical Findings Data Sources Illustrative Papers
Advertising lowers systematic market risk
while increasing idiosyncratic risk
Communicating the di erentiated added value
created by product innovation yields higher
for pioneering innovations
Firms that are more productive in converting
advertising and promotion resources into
marketing outputs may create greater
shareholder value over time
2. Price
promotions
Promotional
expenditures
Price promotions diminish long- term  rm
value, even though they have positive e ects
on revenues and, in the short run, on pro ts
A policy of aggressive new product
introductions acts as an antidote for
excessive reliance on consumer incentives
Price promotions in the pharmaceutical
industry have a positive e ect on
idiosyncratic risk
J.D. Power and
Associates
Scott- Levin &
PERQ/HCI
(Pharma)
Pauwels et al. (2004)
Srinivasan et al.
(2009)
Osinga et al. (2011)
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Branding and  rm value 193
returns over and above the indirect e ect of advertising by enhancing top-
and bottom- line performance (Grullon et al., 2004; Joshi and Hanssens,
2009). A recent meta- analysis shows that advertising and promotional
spending have positive e ects on the market value of a  rm (Conchar et
al., 2005). Speci cally, a  rm’s advertising a ects its visibility with the
investors, resulting in a direct e ect on the  rm’s market capitalization
(Joshi and Hanssens, 2009). In addition, advertising acts as a signal of the
rm’s nancial well- being (Gi ord, 1997; Mathur et al., 1997; Mathur and
Mathur, 2000). Investors, aware of the bene ts of increased advertising
through enhanced brand equity (Barth et al., 1998; Rao et al., 2004), may
also look beyond a  rm’s current cash  ows and translate the long- term
e ects of advertising into  rm valuation.
Recent studies con rm that advertising expenditures create intangible
brand assets (Grullon et al., 2004), one that is not readily transferable
in the event of bankruptcy. Using a sample of  rms that raise signi cant
amounts of equity capital, this study  nds that such  rms increase their
advertising signi cantly more than  rms with higher  nancial leverage
(i.e., higher levels of debt relative to equity capital). Srinivasan et al.
(2009)  nd that communicating the di erentiated added- value created by
product innovation or advertising to consumers yields higher  rm value
e ects of these innovations, with results even stronger for pioneering inno-
vations. Further, advertising enhances market penetration, makes it easier
to launch product extensions, and increases customer loyalty. Through
these mechanisms, advertising reduces cash  ow volatility (Fischer et al.,
2009) and hence  rm risk overall. Advertising also can in uence investor
portfolio choices. Individual investors, unlike institutional ones, prefer
holding stocks of well- known  rms (Frieder and Subrahmanyam, 2005).
Firms that engage in higher levels of advertising tend to have a relatively
large number of individual stockholders whose buy and sell decisions
would be less coordinated (Xu and Malkiel, 2003). This scenario could
reduce systematic risk. Consistent with this, recent research indicates that
advertising and R&D indeed lower a  rm’s systematic risk (McAlister et
al., 2007; Osinga et al. 2011). As for idiosyncratic risk, recent research has
found that direct- to- consumer advertising (DTCA) in the pharmaceutical
industry increases idiosyncratic risk even though this increase does not
a ect investors who maintain a well- diversi ed portfolio. Osinga et al.
(2011) argue that the increase in idiosyncratic risk likely occurs because
investors perceive DTCA as a risky investment given its limited sales
impact.
In summary, advertising – a key driver of strong brands – positively
in uences intangible  rm value, decreases the systematic risk, and increases
the idiosyncratic risk of the  rm.
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194 Handbook of marketing and  nance
Promotions, Brand Equity, and Firm Value
Sales promotions are generally seen as detrimental to brand equity, even
though they produce positive short- term impacts on sales and revenue
(Winer, 1986; Mela et al., 1997). The e ect of promotions on brand equity
occurs primarily through market- based brand equity indicators in lower-
ing the price premium; when the per- unit margin of the promoted brand
is a ected, there may be increased switching from higher- to lower- margin
brands (or vice versa). While many studies examine the impact of price
promotions on revenues, their impact on  rm valuation is relatively under-
researched. Recent research  nds that investor reactions to price promo-
tions are negative (Pauwels et al., 2004; Srinivasan et al., 2009). Osinga
et al. (2011)  nd that direct- to- physician (DTP) price promotions in the
pharmaceutical industry have a positive e ect on idiosyncratic risk, which
is in line with the negative stock return impact. These negative impacts
on returns and volatility likely occur for two reasons: price promotions
may signal desperation and forecast decreased  rm earnings. Managerial
inertia explains why the short- run success of promotions makes it attrac-
tive for managers to continue using them (Nijs et al., 2007). This results
in a vicious cycle of competitive promotion escalation, eventually eroding
brand equity, pro t margins, and  rm value.
In summary, price promotions are negatively related to brand equity
and to  rm value in the long run.
CONCLUSIONS AND DIRECTIONS FOR FUTURE
RESEARCH
This chapter has assembled research that emphasizes and demonstrates
the importance of branding activities in building shareholder value. A key
contribution of this chapter is the development of an integrative concep-
tual framework that links branding strategies and tactics to the creation
of brand equity and identi es two mechanisms by which brands drive the
components of shareholder value. Speci cally, the cash  ow perspective
views brands- as- assets with investments in brands enhancing  rm value
directly through their e ects on cash  ows, while the signaling perspec-
tive views brands- as- information with brands serving as visible signals of
nancial well- being of a  rm. A second contribution is the provision of a
framework for organizing and relating metrics of brand equity to those
of shareholder value creation, an activity that advances the marketing
metrics imperative overall (Lehmann and Reibstein, 2006).
This chapter has reviewed 56 research articles seeking to establish
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Branding and  rm value 195
the link between branding and shareholder value. While much has been
learned about the value- creating e ects of brands, signi cant gaps in our
understanding remain:
Is there a hierarchy governing the e ects of consumer- , market- and
nancial- based brand equity and their links to shareholder value
generation? More importantly, are some of these metrics of brand
equity leading indicators of shareholder value losses and gains?
What is the best approach to quantifying the value of brands and
assessing their impact on cash  ows, growth, and risk?
Are the signaling and information routes equally e ective in driving
shareholder value? When does the brand- as- asset dominate over the
brand- as- information route?
How does a brand’s participation in social media drive shareholder
value, if at all?
How can  rms mitigate the value- destroying consequences of brand
crisis events?
What is the theory of risk as it pertains to brands and brand equity?
Does the notion of risk diversi cation apply to brand strategy and
rm value e ects?
What are the mechanisms whereby brands create shareholder value?
How do internal organizational factors such as employees’ engage-
ment with the brand or internal branding programs drive share-
holder value?
From a conceptual and empirical perspective, much remains to be
learned about the nature and role of risk in the brand– rm value relation-
ship. Speci cally, a stronger conceptualization of the risk constructs and
mechanisms is needed, with attention to the particulars of the branding
environment at hand. Very few marketing papers even consider risk within
the brand–shareholder value environment, and those studies that do view
brands merely as an insurance- like protection mechanism that helps  rms
weather di cult times or equity challenges. But, the  nance literature
suggests other mechanisms through which branding may a ect the  rm’s
risk pro le; for example, risks can be managed through information
ows. We need to understand how and whether the risk frameworks and
mechanisms from  nance apply to brands.
Further, our conceptualizations of risk are arguably underdeveloped
for exposing desired brand e ects. We have considered systematic and
idiosyncratic risk, but our theorizing needs sharpening on the di eren-
tial e ects of branding on these components of risk. We should perhaps
consider whether a di erent conceptualization of risk is appropriate in
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196 Handbook of marketing and  nance
branding situations. For example, much consumer behavior literature
highlights the risks of brand dilution and reputation; future research needs
to consider these potentially di erent forms of brand- related risk and how
they relate to the components of  rm risk. It may be that to advance our
understanding of the link between branding and shareholder value, we
need to develop unique theories of branding and risk with new constructs
and mechanisms that are tailored to the branding situation at hand.
Lastly, conclusive research on the branding–shareholder value linkage
hinges on brand valuation metrics that are relevant, predictive, calibrated,
reliable, sensitive, transparent, and objective. The marketing discipline is
not even in general agreement that brands are assets that need to be repre-
sented as such on the balance sheet (Marketing Accountability Standards
Board Conference, 2010). Further, there exist signi cant complications
from the accounting perspective that prohibit advancement on this front.
Su ciently broad- based investor support is lacking and other critical
aspects of  nancial reporting are being prioritized (Bielstein, 2010). It
is therefore imperative for multiple stakeholders including marketers,
accountants, and the investor community, to work together to advance
this goal.
NOTES
1. We do not discuss the  ndings on distribution and new product decisions even though
these are part of the 4Ps that clearly in uence brand equity and  rm value, since their
in uences on  rm value are reviewed in other chapters in the book.
2. The detailed review of upside and downside risk can be found in Nawrocki (1999).
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... A memorable name, an easy to recognize symbol, or even notable packaging might represent the unique aspect of a brand. Srinivasan, Hsu, and Fournier (2011) called the unique and memorable aspects of a brand the symbol system that firms use as the public face of the brand. The symbol system enables customers to identify the goods and services they prefer for whatever reasons. ...
... Trademarks allow firms to protect the symbol system of their brands against competitors (Srinivasan, Hsu, and Fournier 2011;von Graevenitz 2007;Aaker 1991). Similar to the US, European law defines a trademark as follows: "A trade mark may consist of any signs capable of being represented graphically, particularly words, including personal names, designs, letters, numerals, the shape of goods or of their packaging, provided that such signs are capable of distinguishing the goods or services of one undertaking from those of other undertakings" (Article 2, Directive 2008/95/EC of the European Parliament and of the Council). ...
... They incorporate durable symbols, words, and signs that consumers are likely to remember. Trademarks establish brand differentiation, help to avoid confusion among customers, build reputational capital, and are a key strategic tool for the long-run development of brand equity (Srinivasan, Hsu, and Fournier 2011). Managers can choose to renew existing trademarks and introduce new trademarks that reinforce and maintain existing brand image in the minds of consumers. ...
Article
Full-text available
Most marketing practitioners and scholars agree that marketing assets such as brand equity significantly contribute to a firm’s financial performance. In this paper, we model brand equity as an unobservable stock that results from up to 30 years of past brand-related investment flows. Using firm-specific trademarks as investment proxies, our results show a significant long-run impact on financial performance. The dynamic profile of brand-related investments has an inverted-U shape that reaches its peak after 11 years. On average, it takes four years before brand-related investments show a positive return, and investments older than 19 years show no significant impact. For the median trademarking firm, brand equity contributes €265,000 to annual profits.
... A well-established literature documents that there is a positive association between brand value and stock returns (e.g., Barth, Clement, Foster, & Kasznik, 1998;Madden, Fehle, & Fournier, 2006;Mizik & Jacobson, 2008, 2009). However, research has yet to investigate the mechanisms driving the effect of brand value on firm value (Hsu, Fournier, & Srinivasan, 2012). ...
... We use theoretical perspectives on the cash flow implications of strong brands to derive the following three hypotheses. Several studies argue that strong brands can insulate firms' cash flows from the harmful effects of competitive actions (Keller, 2012;Zinkhan & Pereira, 1994) and adverse business conditions (Hsu et al., 2012;Johansson, Dimofte, & Mazvancheryl, 2012), thereby increasing firm value. Our Vulnerability hypothesis therefore predicts that brand value has a stronger impact on firm value for firms with high cash flow vulnerability, and during periods in which investors are more risk averse. ...
... A last important benefit of strong brands is that they can reduce the price elasticity of demand for the firm's products or services. As such, strong brands may allow firms to set higher prices without adversely affecting their sales volumes (Hsu et al., 2012;Png, 2012). This feature generates our Price hypothesis stating that brands have a stronger impact on firm value for firms with a higher potential for further product or service price increases. ...
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While several studies find a positive impact of brand value on firm value, we still know very little on the variables moderating the brand value–firm value relation. In this study, we address this gap in the literature by developing and testing a new framework on the contingencies affecting the impact of brand value changes on stock returns. Drawing from branding theory, we hypothesize that stock price reactions to brand value changes are more positive for firms with high cash flow vulnerability, valuable growth opportunities, and high potential for further product or service price increases. We empirically examine the importance of these three moderators through an event study analysis of 503 brand value announcements derived from Interbrand’s Best Global Brands lists from 2001 to 2012. We obtain evidence of significant abnormal stock returns on brand value announcement dates, with a brand to firm value conversion rate of approximately 4%. Cross-sectional regression analyses of announcement day abnormal stock returns suggest that shareholders mainly value the potential of brands to reduce cash flow vulnerability to adverse shocks. We obtain only mixed evidence on the importance of brands in generating growth, and no evidence for their role in allowing firms to set higher prices. Our results, which hold under a range of sensitivity tests, yield clear managerial guidelines regarding the types of firms for which strong brands matter most.
... A well-established literature documents that there is a positive associa- tion between brand value and stock returns (e.g., Barth, Clement, Foster, & Kasznik, 1998;Madden, Fehle, & Fournier, 2006;Mizik & Jacobson, 2008, 2009. However, research has yet to investigate the mechanisms driving the effect of brand value on firm value (Hsu, Fournier, & Srinivasan, 2012). ...
... We use theoretical perspectives on the cash flow im- plications of strong brands to derive the following three hypotheses. Several studies argue that strong brands can insulate firms' cash flows from the harmful effects of competitive actions (Keller, 2012;Zinkhan & Pereira, 1994) and adverse business conditions ( Hsu et al., 2012;Johansson, Dimofte, & Mazvancheryl, 2012), thereby in- creasing firm value. Our Vulnerability hypothesis therefore predicts that brand value has a stronger impact on firm value for firms with high cash flow vulnerability, and during periods in which investors are more risk averse. ...
... A last im- portant benefit of strong brands is that they can reduce the price elasticity of demand for the firm's products or services. As such, strong brands may allow firms to set higher prices without adversely affecting their sales volumes ( Hsu et al., 2012;Png, 2012). This fea- ture generates our Price hypothesis stating that brands have a stron- ger impact on firm value for firms with a higher potential for further product or service price increases. ...
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U.S. firms are not required to report the values of internally-developed brands on their balance sheets. This paper tests whether brand value estimates provided by an external organism, i.e., the consultancy firm Interbrand, are value relevant. Unlike prior value relevance studies we use an event study analysis, which enables us to assess (i) whether brand value announcements have a causal impact on stock prices, (ii) what is the magnitude of the impact, and (iii) whether there are cross-sectional differences in the brand value impact. We document that stockholder reactions to brand value announcements are both statistically and economically significant. Stock prices are linearly increasing in the magnitude of the brand value change relative to the previous year's estimated value.
... A well-established literature documents that there is a positive association between brand value and stock returns (e.g., Barth, Clement, Foster, & Kasznik, 1998;Madden, Fehle, & Fournier, 2006;Mizik & Jacobson, 2008, 2009). However, research has yet to investigate the mechanisms driving the effect of brand value on firm value (Hsu, Fournier, & Srinivasan, 2012). ...
... We use theoretical perspectives on the cash flow implications of strong brands to derive the following three hypotheses. Several studies argue that strong brands can insulate firms' cash flows from the harmful effects of competitive actions (Keller, 2012;Zinkhan & Pereira, 1994) and adverse business conditions (Hsu et al., 2012;Johansson, Dimofte, & Mazvancheryl, 2012), thereby increasing firm value. Our Vulnerability hypothesis therefore predicts that brand value has a stronger impact on firm value for firms with high cash flow vulnerability, and during periods in which investors are more risk averse. ...
... A last important benefit of strong brands is that they can reduce the price elasticity of demand for the firm's products or services. As such, strong brands may allow firms to set higher prices without adversely affecting their sales volumes (Hsu et al., 2012;Png, 2012). This feature generates our Price hypothesis stating that brands have a stronger impact on firm value for firms with a higher potential for further product or service price increases. ...
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Despite widespread acknowledgment of the importance of branding, little is known about the magnitude and the determinants of the impact of brand value on brand owners’ market value. Our paper addresses this gap in the literature by conducting an event study on the effect of brand value announcements on the stock prices of brand-owning firms. Our sample consists of 329 brand value announcements derived from Interbrand’s Best Global Brands lists. We obtain evidence of significant abnormal stock returns on brand value announcement dates, with the magnitude of stock price reactions increasing in the magnitude of brand value changes. We also formulate and test hypotheses on the moderating impact of macroeconomic conditions and brand owner characteristics on the strength of the brand value – firm value relation. We find that stockholders place less weight on brand value information during economic downturns, and more weight on brand value information provided by firms for which intangible assets are a more important part of their asset structure. Furthermore, the results indicate that stockholders put a higher value on brand value changes realized by firms that spend less on advertising.
... First, since brand equity is a long-term accumulated asset resulting from the interactions of firms' previous branding activities, strategies and customers, it should have a higher level of signal credibility than that of short-term marketing mix tools. Second, brand equity is a multi-faceted complex construct [19], and thus, shows a lower level of signal clarity because of the difficulties in assessing the consistency in firms' previous marketing activities and brand investments. Therefore, brand equity represents signals with high credibility but low clarity for most of the customers. ...
... Second, public investors often face difficulties in fully understanding brand equity because they lack access to important information channels and an adequate level of cognitive resources to accurately interpret mess information [35,39]. Finally, brand equity is a complex and multi-faceted firm asset that has been developed through long-term accumulation, which increases signal credibility of brand equity but decreases its clarity and makes it difficult to be evaluated by public investors [19]. To overcome difficulties of signal clarity, public investors tend to rely on external cues [40] such as analysts' recommendations to support their evaluation and investment decisions [35,40]. ...
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Current literature has overlooked the signaling effects of the brand on a firm’s sustainable performance through financial analysts. This study posits that financial analysts may serve as the information bridge connecting brand equity and a firm’s sustainable performance by providing professional recommendations of stock investments to public investors. Using a longitudinal archived dataset of Chinese listed firms, we found that: (1) brand equity improves the level of analysts’ recommendations for a focal firm’s stock, and also reduces the inconsistency of analysts’ recommendations; (2) industrial competition further strengthens the positive impact of brand equity on analysts’ recommendation level and strengthen its negative impact on recommendation inconsistency; (3) analyst recommendations mediate the relationship between brand equity and a firm’s sustainable performance in terms of abnormal return, systematic and idiosyncratic risk. These findings emphasize the importance of financial analysts’ recommendations in influencing the value of brand equity on sustainable firm performance.
... There is, however, emerging agreement (Katsikeas et al., 2016;Keller and Lehmann, 2006;Lehmann, 2004;Srinivasan et al., 2012) that the brand strength link to performance should be viewed as a chain-of-effects as reflected in Figure 4.1. The end-result for the firm is that brand strength translates into brand performance (the brand versus a non-or weakly branded version of the product) and that this translates into brand value as a financial asset for the firm and ultimately investors. ...
... They all reflect the classic marketing idea of brand positioning in the mind of the consumer (Calder, 2010) or the perceived value to the customer (Sexton, 2009). Brand Strength, in contrast, should link the brand equity in the minds of consumers to actual choices in the market (Srinivasan, Hsu, and Fournier, 2012). The Common Language in Marketing Project (2018) defines Brand Strength as "a non-monetary, point-in-time measure which seeks to capture the perceived overall attractiveness in the hearts and minds of consumers that the brand imbues to its offerings relative to that of other branded offerings (italics added)." ...
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Investments in intangibles, as opposed to things such as plant and equipment, have become more and more critical to the financial performance and growth of organizations. Brands represent an important source of intangible investment. Unfortunately, expenditures for branding are still commonly treated in financial accounting as expenses rather than as investments. There is a movement, however, to treat brands as financial assets. This can be approached directly by evaluating the financial value of a brand based on how strong the brand is in determining consumer choice versus a comparatively weakly branded product. We present a practical approach to evaluating brand strength using discrete choice experiments and estimation techniques that allow for the calculation of the value of brands as financial assets. Treating brands as assets and not expenses can allow companies to align marketing and finance around internal investments and provide outside investors with much needed financial information.
... Brands are legally protected by trademarks and incorporate durable symbols, words, and signs that consumers are likely to remember and help to avoid confusion among customers. Srinivasan, Hsu, and Fournier (2011) called the unique and memorable aspects of a brand the symbol system that firms use as the public face of the brand. The symbol system enables customers to identify the goods and services they preferfor whatever reasons. ...
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Trademarking firms are more productive, generate higher profits, and have a better survival rate. Trademarking firms are in one word more successful, which might motivate non-trademarking firms to adopt a trademark strategy. But this does not seem to be the case. The proportion of trademarking firms in the German business sector amounts to just 18%. This figure is quite low, given that nearly each firm has reputation to protect. But why does the vast majority of firms not have registered trademarks? Using a representative sample of German firms, the present paper links certain firm characteristics to a firm’s propensity to register trademarks. The empirical results point to circumstances under which trademarks are significantly more often used: this is the case where a large distance between a firm and its customers exists, a firm’s product quality is difficult to assess, a firm’s products are characterised by a limited (but not strong) substitutability, and where a firm is engaged in R&D and introduces innovative products. Trademarks are considerably less frequently used if none of this is the case.
... Despite the theory of CBBE is well developed at the consumer level (Aaker, 1996;Erdem & Swait, 2014;Srinivasan, Hsu, & Fournier, 2011), the measuring instruments of CBBE deal with consumers evaluating brand, but the outcome of such evaluations is the brand equity, another level of analysis. At this level, brands compete to be chosen and this gives them a performance context (Noble & Basil, 2011). ...
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Every few years, business is galvanized by a new concept. Accountability is the latest idea in the spotlight. It's a huge topic, and in the broadest sense embraces ethics, corporate governance, and all the issues spawned by the recent spate of business scandals. Vulcans, Earthlings and Marketing ROI deals with a more pragmatic aspect: the accountability behind the question "Are our investments in marketing and advertising sensible and successful, short and long term, from a business point of view?" In Part 1 the authors establish that finance, marketing, and advertising share common ground in the value of brands. Part 2 reviews the evidence for the business impact of marketing and advertising, summarizing key research and practical experience. Part 3 outlines what it takes to build an accountability culture and profiles some techniques that are useful for framing and measuring the business impact of marketing and advertising investment. The book is intended for anyone with an interest in accountability as it applies to short- and long-term marketing effort. © 2008 Institute of Communication Agencies and Wilfrid Laurier University Press. All rights reserved.
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