Advanced Search
MyIDEAS: Login to save this article or follow this journal

Brand perception, cash flow stability, and financial policy

Contents:

Author Info

  • Larkin, Yelena
Registered author(s):

    Abstract

    This paper demonstrates that intangible assets play an important role in financial policy. Using a proprietary database of consumer brand evaluation, I show that positive consumer attitude toward a firm's products alleviates financial frictions and provides additional net debt capacity, as measured by higher leverage and lower cash holdings. Brand perception affects financial policy through reducing overall firm riskiness, as strong consumer evaluations translate into lower future cash flow volatility as well as higher credit ratings for potentially volatile firms. The impact of brand is stronger among small firms, contradicting a number of reverse causality and omitted variables explanations.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X13001608
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 110 (2013)
    Issue (Month): 1 ()
    Pages: 232-253

    as in new window
    Handle: RePEc:eee:jfinec:v:110:y:2013:i:1:p:232-253

    Contact details of provider:
    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Financial policy; Capital structure; Cash flow volatility; Cash holdings; Brand;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Michael R. Roberts & Mark T. Leary, 2004. "Do Firms Rebalance Their Capital Structures?," Econometric Society 2004 North American Summer Meetings 52, Econometric Society.
    2. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
    3. Ivo Welch, 2011. "Two Common Problems in Capital Structure Research: The Financial‐Debt‐To‐Asset Ratio and Issuing Activity Versus Leverage Changes," International Review of Finance, International Review of Finance Ltd., vol. 11(1), pages 1-17, 03.
    4. Bart J. Bronnenberg & Sanjay K. Dhar & Jean-Pierre H. Dubé, 2009. "Brand History, Geography, and the Persistence of Brand Shares," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 87-115, 02.
    5. Efraim Benmelech, 2009. "Asset Salability and Debt Maturity: Evidence from Nineteenth-Century American Railroads," Review of Financial Studies, Society for Financial Studies, vol. 22(4), pages 1545-1584, April.
    6. Thomas, Lacy Glenn, 1989. "Advertising in Consumer Goods Industries: Durability, Economies of Scale, and Heterogeneity," Journal of Law and Economics, University of Chicago Press, vol. 32(1), pages 163-93, April.
    7. Bronnenberg, B.J.J.A.M. & Dhar, S. & Dube, J.-P., 2007. "Consumer packaged goods in the United States: National brands, local branding," Open Access publications from Tilburg University urn:nbn:nl:ui:12-332116, Tilburg University.
    8. Kisgen, Darren J., 2009. "Do Firms Target Credit Ratings or Leverage Levels?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(06), pages 1323-1344, December.
    9. Jeffrey MacKie-Mason, 1988. "Do Taxes Affect Corporate Financing Decisions?," NBER Working Papers 2632, National Bureau of Economic Research, Inc.
    10. Kyle Bagwell, 2005. "The Economic Analysis of Advertising," Discussion Papers 0506-01, Columbia University, Department of Economics.
    11. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    12. Laurent Fresard, 2010. "Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings," Journal of Finance, American Finance Association, vol. 65(3), pages 1097-1122, 06.
    13. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
    14. Yacine Ait-Sahalia & Jonathan A. Parker & Motohiro Yogo, 2002. "Luxury Goods and the Equity Premium," Working Papers 145, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
    15. Eugene F. Fama & Kenneth R. French, . "Testing Tradeoff and Pecking Order Predictions about Dividends and Debt.”," CRSP working papers 506, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    16. Kovenock, Dan & Phillips, Gordon M, 1997. "Capital Structure and Product Market Behavior: An Examination of Plant Exit and Investment Decisions," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 767-803.
    17. Peter MacKay & Gordon M. Phillips, 2005. "How Does Industry Affect Firm Financial Structure?," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1433-1466.
    18. Kovenock, Dan & Phillips, Gordon, 1995. "Capital Structure and Product-Market Rivalry: How Do We Reconcile Theory and Evidence?," American Economic Review, American Economic Association, vol. 85(2), pages 403-08, May.
    19. Campello, Murillo, 2006. "Debt financing: Does it boost or hurt firm performance in product markets?," Journal of Financial Economics, Elsevier, vol. 82(1), pages 135-172, October.
    20. Gustavo Grullon, 2004. "Advertising, Breadth of Ownership, and Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 439-461.
    21. Paul J. Irvine & Jeffrey Pontiff, 2009. "Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1149-1177, March.
    22. Efraim Benmelech & Nittai K. Bergman, 2008. "Collateral Pricing," NBER Working Papers 13874, National Bureau of Economic Research, Inc.
    23. Armen Hovakimian & Ayla Kayhan & Sheridan Titman, 2011. "Are Corporate Default Probabilities Consistent with the Static Tradeoff Theory?," NBER Working Papers 17290, National Bureau of Economic Research, Inc.
    24. Lucian Bebchuk & Alma Cohen & Allen Ferrell, 2009. "What Matters in Corporate Governance?," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 783-827, February.
    25. Michael Faulkender & Mitchell A. Petersen, 2003. "Does the Source of Capital Affect Capital Structure?," NBER Working Papers 9930, National Bureau of Economic Research, Inc.
    26. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    27. Dasgupta, Sudipto & Titman, Sheridan, 1998. "Pricing Strategy and Financial Policy," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 705-37.
    28. Kim, Chang-Soo & Mauer, David C. & Sherman, Ann E., 1998. "The Determinants of Corporate Liquidity: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 335-359, September.
    29. Phillips, Gordon M., 1995. "Increased debt and industry product markets An empirical analysis," Journal of Financial Economics, Elsevier, vol. 37(2), pages 189-238, February.
    30. Oliver D. Hart, 1983. "The Market Mechanism as an Incentive Scheme," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 366-382, Autumn.
    31. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
    32. John R. Graham & Michael L. Lemmon & James S. Schallheim, 1998. "Debt, Leases, Taxes, and the Endogeneity of Corporate Tax Status," Journal of Finance, American Finance Association, vol. 53(1), pages 131-162, 02.
    33. Hovakimian, Armen & Opler, Tim & Titman, Sheridan, 2001. "The Debt-Equity Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(01), pages 1-24, March.
    34. Gustavo Grullon & George Kanatas, 2006. "The Impact of Capital Structure on Advertising Competition: An Empirical Study," The Journal of Business, University of Chicago Press, vol. 79(6), pages 3101-3124, November.
    35. Anil Shivdasani & Irina Stefanescu, 2010. "How Do Pensions Affect Corporate Capital Structure Decisions?," Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 1287-1323, March.
    36. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, 09.
    37. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
    38. Kwoka, John E, Jr, 1993. "The Sales and Competitive Effects of Styling and Advertising Practices in the U.S. Auto Industry," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 649-56, November.
    39. Chevalier, Judith A, 1995. "Capital Structure and Product-Market Competition: Empirical Evidence from the Supermarket Industry," American Economic Review, American Economic Association, vol. 85(3), pages 415-35, June.
    40. Francois Gourio & Leena Rudanko, 2011. "Customer Capital," NBER Working Papers 17191, National Bureau of Economic Research, Inc.
    41. Titman, Sheridan, 1984. "The effect of capital structure on a firm's liquidation decision," Journal of Financial Economics, Elsevier, vol. 13(1), pages 137-151, March.
    42. Frieder, Laura & Subrahmanyam, Avanidhar, 2005. "Brand Perceptions and the Market for Common Stock," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(01), pages 57-85, March.
    43. Evgeny Lyandres, 2006. "Capital Structure and Interaction among Firms in Output Markets: Theory and Evidence," The Journal of Business, University of Chicago Press, vol. 79(5), pages 2381-2422, September.
    44. Khanna, Naveen & Tice, Sheri, 2000. "Strategic Responses of Incumbents to New Entry: The Effect of Ownership Structure, Capital Structure, and Focus," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 749-79.
    45. Opler, Tim C & Titman, Sheridan, 1994. " Financial Distress and Corporate Performance," Journal of Finance, American Finance Association, vol. 49(3), pages 1015-40, July.
    46. Chemmanur, Thomas & Yan, An, 2009. "Product market advertising and new equity issues," Journal of Financial Economics, Elsevier, vol. 92(1), pages 40-65, April.
    47. Leena Rudanko & Francois Gourio, 2011. "Customer capital and the business cycle," 2011 Meeting Papers 120, Society for Economic Dynamics.
    48. Parsons, Christopher & Titman, Sheridan, 2009. "Empirical Capital Structure: A Review," Foundations and Trends(R) in Finance, now publishers, vol. 3(1), pages 1-93, March.
    49. Chevalier, Judith A, 1995. " Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing," Journal of Finance, American Finance Association, vol. 50(4), pages 1095-1112, September.
    50. Landes, Elisabeth M & Rosenfield, Andrew M, 1994. "The Durability of Advertising Revisited," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 263-76, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:110:y:2013:i:1:p:232-253. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.