The Impact of Brand Quality on Shareholder Wealth

TLDR

The study examines how brand quality affects shareholder wealth by analyzing its impact on stock returns, systematic risk, and idiosyncratic risk while applying a contingency theory framework that considers two investor‑follower factors. The authors use this contingency theory view to assess how the moderating roles of current‑period earnings changes and increasing competition influence the relationship between brand quality and shareholder wealth. Unanticipated changes in brand quality raise stock returns and lower idiosyncratic risk but increase systematic risk, with earnings changes and competition moderating these effects, and the results remain robust to endogeneity concerns and alternative model specifications.

Abstract

This study examines the impact of brand quality on three components of shareholder wealth: stock returns, systematic risk, and idiosyncratic risk. The study finds that brand quality enhances shareholder wealth insofar as unanticipated changes in brand quality are positively associated with stock returns and negatively related to changes in idiosyncratic risk. However, unanticipated changes in brand quality can also erode shareholder wealth because they have a positive association with changes in systematic risk. The study introduces a contingency theory view to the marketing–finance interface by analyzing the moderating role of two factors that are widely followed by investors. The results show an unanticipated increase (decrease) in current-period earnings enhances (depletes) the positive impact of unanticipated changes in brand quality on stock returns and mitigates (enhances) their deleterious effects on changes in systematic risk. Similarly, brand quality is more valuable for firms facing increasing competition (i.e., unanticipated decreases in industry concentration). The results are robust to endogeneity concerns and across alternative models. The authors conclude by discussing the nuanced implications of their findings for shareholder wealth, reporting brand quality to investors, and its use in employee evaluation.