Abstract

Keywords

۱٫ Introduction

۲٫ The multidimensionality of brand equity

۳٫ Systematic risk asymmetry

۴٫ The effect of brand attributes on risk

۵٫ Model

۶٫ Results

۷٫ Discussion and conclusion

Acknowledgement

Appendix A.

Appendix B. Supplementary material

References

Abstract

The authors investigate the extent to which central customer-based brand equity dimensions (Differentiation, Relevance, Esteem, Knowledge, and Energy) influence a firm’s systematic risk (i.e., beta) during both market upturns and downturns. The results demonstrate that aggregating upside and downside beta or different dimensions of brand equity masks the true associations which can be seen only in the disaggregate analyses. The authors find that Relevance and Knowledge play roles as stabilizers, showing negative relationships with both upside gains and downside risk, while Esteem plays the role of protector, showing a negative relationship with only downside losses and not influencing upside gains; Energy acts as a booster, being positively associated with a firm’s potential gains in a period of market growth without increasing the firm’s expected losses during a bad market. The positive relationship of Energy with aggregate risk could be misleading as it hides the beneficial effect of Energy as a booster. The authors also find that Relevance is the most important consideration when people make choices in bad market situations, while Energy becomes the most crucial deciding factor in good market situations. Taking advantage of the multidimensional constructs of brand equity while allowing for the asymmetrical characteristics of risk enables managers to capture the differential role of each brand equity dimension in influencing firm risks, which leads to more sophisticated strategic decisions regarding risk management. In addition to general brand strategy, the authors provide tailored brand strategies to firms from different industries or with different financial characteristics.

۱٫ Introduction

The value of a firm, as depicted by shareholder value, depends not only on cash flow, but also on the firm’s risk, and thereby, the cost of capital used to discount future results. According to the Capital Asset Pricing Model (CAPM), total risk can be decomposed into systematic (market-wide) and unsystematic (firm-specific) risk. Unsystematic risk can be eliminated through diversification. Thus, a risk premium is only attached to systematic risk, i.e., a firm’s “beta” or the extent to which a firm’s returns co-vary with market-wide returns. Therefore, marketing strategies that are associated with lower beta enhance a firm’s value, apart from their effect on cash flow.

Because of the centrality of risk in affecting firm valuation, some recent work (e.g., Singh, Faircloth, & Nejadmalayeri, 2005; McAlister, Srinivasan, & Kim, 2007; Tuli & Bharadwaj, 2009), has investigated the relationship between marketing variables and a firm’s beta. These studies are based on the perspective that market-based intangible assets (i.e., brand equity) created by strategic activities such as advertising or R&D programs will influence a firm’s performance and decrease the firm’s risk. That is, brand equity acts as a barrier to competition, increases customer loyalty, and as a result, decreases the covariance between the firm’s stock return and market return, thereby lowering the firm’s CAPM beta. There are several approaches to measuring brand equity, but customer-based brand equity has shown to significantly affect a firm’s risk (e.g., Rego, Billett, & Morgan, 2009; Johansson, Dimofte, & Mazvancheryl, 2012).