The goal of this article by Rego, Billett and Morgan is to uncover the relationship between consumer-based brand equity and firm risk from financial angle. Firstly, the authors introduced consumer-based brand equity (CBBE) and firm risk which will be the main subject to study in this article. As is indicated in empirical literature, market-based brand should not only increase their income but also lower their risks. Also by reducing their risks, their value would be increased too, thus this will further help to increase benefits and return.
Moreover, during the literature review, some gaps are found by the authors that the value of marketing in reducing risk to investors is not clearly explained yet. Since marketing costs are beneficial to the firm’s value, they should rather be accounted as a long-term investment than expenses. Then authors introduce two firm-level risks involved in stakeholder which are debt-holder risk and equity-holder risk. More specifically, debt-holder risk is seen as vulnerability-based risk. Equity-holder risk can be divided into two aspects: systematic and unsystematic risks.
Both of them can be seen as variability-based risk but only unsystematic risk can be controlled by managers since it’s related to firm events and systematic risk is difficult for managers to control as it’s reflected by financial market. Secondly, from more empirical studies, the authors suggest that high CBBE leads to high level of consumer awareness, strong, positive and unique association and brand loyalty. Thus cash flows are protected. On the other hand, high CBBE also can provide good reputation which will decrease both debt and equity risks (H1).
Moreover, high CBBE means idiosyncratic and can protect firms in market-level. Also, unsystematic risk can explain more equity risk than systematic one as is indicated before (H2). Then, the equity-based risk can be divided into upside and downside risks. When in “downside” situation (stock returns are declining), high CBBE affect and reduce risk by stronger consumer loyalty and commitment, and much valued in stock and cash flow market than other firms by investors. Finally, from this point, the authors assess the relationship of CBBE and debt-holder risk, equity-base risk, and try to predict firm risk as well.
The hypotheses are summarized as CBBE will help decrease both types of risks, more strongly in decreasing unsystematic equity risks and downside equity risks. To test the hypotheses, the research design is a cross-sectional design using the data from Harris Interactive. The data are valid for the companies are consumer brands, from different categories which ensure the generalizability and they are publicly traded. For internal validity, financial firms, privately held companies and nonprofit organizations are removed.
CBBE is measured by four variables taken from Keller’s (1993) study: familiarity, perceived quality, purchase consideration and distinctiveness. For firm risk measures, credit ratings are used for debt-based risk and stock return for equity-based risk. Then the authors use regression model to assess both systematic and unsystematic risks. All the data are ensured validity by author. As there also are other factors other than CBBE affecting firm risks, six variables: firm size, leverage, return on assets, ROA variability, market to book ratio and diversification are used as control variables.
To formulate the model, ordered logit approach and ordinary least squares (OLS) linear regression approach are used. More specifically, because of the longitudinal rationale, for the credit rating model, cluster-adjusted robust standard errors are estimated. For equity-holder regression model, the Newey-West method is used and reported the standardized OLS estimates. After estimate using industry- and year-specific dummies, the model is indicated no problem in multicollinearity.
Then the authors examine the relationship between risks and variables (control variables with and without CBBE variable). The research results suggest that after putting in CBBE the R-square increased which means CBBE is a strong predictor of firms’ ability in financial markets. From table 3,4 and 5, it can be indicated that CBBE is negatively associated with both risks. From table 4, H2 is supported that CBBE is stronger negatively related to unsystematic risk than systematic one. Consistence with H3, in systematic risk, CBBE always helps to reduce more downside risk than upside.
As a theoretical implication for the research, overall this study helps to uncover the importance of brand assets in reducing firm risk aspect for the first time. Moreover, when the economic market is uncertain, CBBE is proved to help reduce firms’ systematic equity risks. From financial angle, brand assets among intangible assets can actually affect marketed-base firms’ debt capacity which was rejected by financial researchers before. Maybe, finance research could focus on the difference between market-based and none-market-based firm.
For managerial implication, marketers could prove that CBBE does help to lower the risk and increase firm value when persuading their CFOs invest in brand assets. When forming the risk-management strategy, brand assets should also be included. So it is indicated that during the economic recession, managers can not reduce expenditures on brand because it will increase firm risk more likely. This is opposite to what many markets think they should do. At last, accounting regulations should be developed as brand assets is more of an investment rather than expense.
This article has limitations in generalization to the firms have business customers as in the sample the companies whose end-users are consumers and not standard formulation in model setup. And the sample database is using US consumers so it may more useful for US firms not for other regions. Future study could use another culture for sample or see if different cultures will moderator the relationship between CBBE and firm risk. Moreover, further research could focus on CBBE, risks and returns.
And the relationship between other market-based asset and firm risk could also be studied as this one already uncovered one of the market-based assets: CBBE. In my opinion, other kinds of equity such as high-equity brand could be studied in terms of the relationship with firm risks as well. Moreover, such research could expand to service product category to implicate marketers as well. References Rego, Lopo L. , Matthew T. Billett, and Neil A. Morgan (2009), “Consumer-Based Brand Equity and Firm Risk,” Journal of Marketing, 73 (November), 47-60.