This article investigates the trade-off of developing a brand facing a firm. Establishing the brand on the one hand reduces liquidity (subjective) risk perceived by investors through effective marketing, but on the other hand increases market (objective) risk through incurring a substantial advertising expenditure to accumulate intangible assets. I estimate the model parameters using a new liquidity-augmented Capital Asset Pricing Model developed by Liu (2006). I find that as advertising expenditure increases, the brand lowers liquidity risk associated with perceived risk by consumers and investors, but increases market risk associated with asset-market structure. Although the impact through which the role of brands operated differed somewhat across industry characteristics, I find that the general impact of brand contribution is empirically plausible across the firm products.
AakerDavid A. (1991). Managing brand equity: Capitalizing on the value of a brand name. New York: Free Press Publishers.
2.
AakerDavid A. (1992). Managing the most important assets: Brand equity. Strategy and Leadership, 20(5), 56–58.
3.
AakerDavid A.RobertJacobson (1994). The financial information content of perceived quality. Journal of Marketing Research, 31, 191–201.
4.
BallesterMartaLivnatJoshuaSeethamrajuChandrakanth (1998). Individual-firm style loadings, unrecorded economic assets, and systematic risk. Journal of Accounting, Auditing and Finance, 13(3), 275–296.
5.
BarthMaryKasznikRonMcNicholsMaureen (2001). Analyst coverage and intangible assets. Journal of Accounting Research, 39(1),1–34.
6.
BartholdyJanPearePaula (2005). Estimation of expected return: CAPM vs. Fama and French. International Review of Financial Analysis, 14, 407–427.
7.
BrownMillward (2007). Managing the brand as an intangible asset. Retrieved from http://www.warc.com/Pages/Taxonomy/Results.aspx?q=&Area=Articles&Page=3&Tab=&DVals=&SourceOR=&DRange=&Filter=All&SubjectRef=262&qr= (accessed on 20 December 2010).
8.
CarhartMark M. (1997). On persistence in mutual fund performance. Journal of Finance, 52, 57–82.
9.
ChenPingJianZheng (2006). Not so intangible: The link between intangible assets and M&Amp;A returns. Retrieved from http://www.watsonwyatt.com/pubs/horizons/2009_02/Horizons_06_Intangibles.pdf (accessed on 8 March 2012).
10.
DawarNirajParkerPhilip (1994). Marketing universals: The use of brand name, price, physical appearance, and retailers’ reputation as signals of product quality. Journal of Marketing, 58(2), 81–95.
11.
ErdemTullinSwaitJoffre (1998). Brand equity as a signaling phenomenon. Journal of Consumer Psychology, 7, 131–157.
12.
FamaEugeneFrenchKenneth R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33, 3–56.
13.
FamaEugeneFrenchKenneth R. (1996). Multifactor explanations of asset pricing anomalies. Journal of Finance, 51, 55–84.
14.
GrullonGustavoGeorgeKanatasWestonJames P. (2004). Advertising, breadth of ownership and liquidity. The Review of Financial Studies, 17(2), 439–461.
15.
HarrisonJeffrey S.HallErnest H.NargundkarRajendra (1993). Resource allocation as an outcropping of strategic consistency: Performance implications. Academy of Management Journal, 36, 1026–1052.
16.
LevBaruch (2005). Intangible assets: Concepts and measurements. Thesis, NYU Stern School of Business.
17.
LiuWeimin (2006). A liquidity-augmented capital asset pricing model. Journal of Financial Economics, 82, 631–671.
18.
MaddenThomas J.FehleFrankFournierSusan (2006). Brands matter: An empirical demonstration of the creation of shareholder value through branding. Journal of the Academy of Marketing Science, 34(2), 224–235.
19.
McAlisterLeighSrinivasanRajiKimMinChung (2007). Advertising, research and development, and systematic equity risk of the firm. Journal of Marketing, 71(1), 35–48.
20.
MertonRobert (1987). A simple model of capital market equilibrium with incomplete information. Journal of Finance, 42, 483–510.
21.
O’HaraMaureen (2003). Presidential address: Liquidity and price discovery. Journal of Finance, 58, 1335–1354.
22.
OhlsonJ.A. (1995). Earnings, book values, and dividends in equity valuation. Contemporary Accounting Research, 11, 661–687.
23.
PastorLubosStambaughRobert F. (2003). Liquidity Risk and Expected Stock Returns. Journal of Political Economy, 111, 642–685.
24.
WeerawardenaJayO’CassAronJulianCraig (2006). Does industry matter? Examining the role of industry structure and organizational learning in innovation and brand performance. Journal of Business Research, 59(1), 37–45.
