This paper investigates the effect of brand capital on firms’ choices of debt structure. Using a sample of publicly listed U.S. firms between 2001 and 2019, we find that firms with higher levels of brand capital rely less on bank debt financing. This finding is robust to the use of alternative regression models and alternate measures of brand capital and bank debt financing. Employing an industry-level positive shock to brand capital as a quasi-natural experiment, we demonstrate that such a shock negatively affects firms’ reliance on bank debt. Our cross-sectional analyses reveal that the effect of brand capital on bank debt is more pronounced for firms with high information asymmetry, weak corporate governance mechanisms, and poor financial conditions. We also find that brand capital-intensive firms raise funds from the public debt market and issue more (or less) unsecured (or secured) debt. Taken together, we show that brand capital has an important bearing on corporate financing decisions.

Introduction

This study investigates the relationship between brand capital and debt choice. Debt stands as a crucial source of financing for corporations, with U.S.-domiciled firms raising over $2.5 trillion in new debt capital in 2020 alone, comprising bonds, syndicated debt, and various types of loans. In contrast, equity markets saw a mere $335 billion secured during the same period.1 Firms that choose to use debt to finance their projects can borrow from banks or issue debt in the public market, also known as debt choice. Existing literature suggests that corporate debt choice is affected by various factors such as corporate disclosure quality (Dhaliwal, Khurana, & Pereira, 2011), analyst coverage (Li, Lin, & Zhan, 2019), external governance mechanisms (Bharath & Hertzel, 2019), state ownership (Boubakri & Saffar, 2019), product market competition (Boubaker, Saffar, & Sassi, 2018), and corporate ownership and control rights (Lin, Ma, Malatesta, & Xuan, 2013). However, the influence of firm-specific brand capital (i.e., an intangible asset encompassing consumers’ awareness, impressions, loyalty, and recognition of a product, service, or organisation (Belo, Gala, Salomao, & Vitorino, 2022, Belo, Lin, & Vitorino, 2014, Hasan, Taylor, & Richardson, 2022, Pillai, 2012)) on debt choice remains unexplored.2 This study aims to bridge this gap in the literature.

The motivation for this study stems from the growing recognition that brand capital constitutes a sizable share of corporate value. For instance, Belo et al. (2022) show that brand capital accounts for 6%–۲۵% of firms’ market value. The Economist reported that “brands account for more than 30% of the stock market value of companies in the S&P 500 index.”۳ Forbes estimated that the top 100 most valuable brands in 2020 were collectively worth $2.5 trillion.4 Notably, financial intermediaries also emphasize the importance of brands, as evidenced by the downgrading of Volkswagen’s credit rating by Fitch Ratings and Standard & Poor’s (S&P) following the 2015 emission crisis. In response to this crisis, Volkswagen had to secure a $21.2 billion bank loan to navigate the challenges, demonstrating the critical role of brand capital in maintaining financial strength and managing reputational damage.5 Against this backdrop, our central research question revolves around the impact of brand capital on firms’ access to public debt and, by extension, its potential to reduce dependence on bank debt. This study aims to empirically address this question, shedding light on a crucial aspect of corporate financing decisions.

Conclusion

Using a large sample of publicly listed U.S. firms over the 2001–۲۰۱۹ period, we examine how brand capital affects firms’ debt choice, whether through bank borrowing or public debt issuance. Grounded in theoretical frameworks of information asymmetry, governance mechanisms, and financial conditions, we anticipate an inverse relationship between brand capital and reliance on bank debt. Our empirical findings align with these expectations, revealing that firms with higher levels of brand capital demonstrate a reduced reliance on bank debt compared with their counterparts with lower brand capital. Our results remain robust to a wide array of robustness tests. To mitigate potential endogeneity concerns, we implement a comprehensive set of tests, including the impact threshold for confounding variable specifications, Oster (2019) bound estimates, a heteroskedasticity-based instrumental variable approach, a two-step GMM method, an entropy balancing method regression, PSM, and a DiD regression approach. Notably, the impact of brand capital on firms’ debt choice emerges unscathed through all these tests.

Further insights emerge from our cross-sectional analyses, revealing that the negative association between brand capital and bank debt is more pronounced in firms characterized by high information asymmetry, weak corporate governance mechanisms, and poor financial conditions. Additional analyses shed light on the preference of brand capital-intensive firms for public debt, coupled with a nuanced use of secured and unsecured debt.