How Brand Equity Management leads to Debt-Holder-Risk

Managers have many ways available to increase firm’s value, including reducing company risk with cash flow (Rappaport, 1997; Srivastata et al., 1998). Several studies have argued that brands have a significant impact on financial market performance (Madden, et al., 2006; Fehle et al., 2008), and the literature predicts that many market-based assets, such as brands, not only succeed to increase firms’ returns, but also reduce the risk, thus increasing the firm’s value (Fornell et al., 2006). The main marketing literature still differentiates between marketing investments (in accounting terms, to be evaluated in the short-term and tending to be minimized) compared to financial investments (long-term) (Rust et al., 2004). Just few studies (Rego et al., 2009; Minz, 2014) have highlighted that firms with strong brand equity should have lower total equity risk. The work addresses this important gap by empirically examining the relationship between brand equity management and the risk to the firm’s debt-holders and equity-holders. This paper investigates the relationship between brand equity and firm-level risk measures, using panel data from 2010-2018 of 46 US listed companies from COMPUSTAT database, data on brand equity from BrandFinance database, and a measure of credit ratings as proxy of Debt-Holder-Risk. The paper demonstrates that brand equity mitigates the effect of market movements (overall total and unsystematic risk), and reduces the variable of debt-holder-risk. The findings mainly suggest that firms with strong brand equity had relatively lower volatility than equity returns during market downturns, which implies that, under unfavorable economic conditions, investors consider them as a safer investment. This paper suggests that branding could also be used as an intangible asset to increase financial performance (Kozlenkova et al., 2014). The implications of the managerial implications of this paper are manifold: managers tend to underestimate investments in the brand if they are guided solely by their financial vision (Mizik, 2008). With this work, managers understand the extent of brand equity management and the relevance to risk, so that they will be more likely to boost underestimated investments in brands in order to maximize the long-term firm’s value.