Consumer-Based Brand Equity and Firm Risk

TLDR

Investors assess risk and return, yet marketing’s influence on risk has been largely overlooked despite theory that brand investments should lower firm risk. The study examines how consumer‑based brand equity affects firm risk across 252 firms from 2000‑2006. Using credit ratings for debt‑holder risk and stock‑return standard deviation for equity‑holder risk, the authors decompose equity risk into systematic and unsystematic components to assess brand impact. Higher consumer‑based brand equity reduces both unsystematic and systematic risk, explaining risk variance beyond traditional finance models and indicating that brand management should be integral to risk strategy during uncertainty.

Abstract

Investors and managers evaluate potential investments in terms of risk and return. Research has focused on linking marketing activities and resource deployments with returns but has largely neglected marketing's role in determining risk. Yet the theoretical literature asserts that investments in market-based assets, such as brands, should lead to reductions in firm risk. Adopting risk measures that are well established in the finance literature, the authors use credit ratings to capture debt-holder risk and the standard deviation of stock returns to measure equity-holder risk, which they then decompose into systematic and unsystematic equity risk. The authors examine the impact of consumer-based brand equity (CBBE) on firm risk using data covering 252 firms from EquiTrend, COMPUSTAT, and the Center for Research in Security Prices over the 2000–2006 period. They find that a firm's CBBE is associated with firm risk and explains variance in the risk measures beyond that explained by existing finance models (i.e., it has “risk relevance”). They also find that CBBE has a stronger role in predicting firm-specific unsystematic risk than systematic risk but that it also has a particularly strong role in protecting equity holders from downside systematic risk. The results have clear economic significance and suggest that managers should make brand management part of the firm's risk management strategy and protect or even increase CBBE investments during periods of economic uncertainty.