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Brand Reputation and the Cost of Capital: Evidence of Adopting a Brand Name as the Corporate Name

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  • YiLin Wu

    (National Taiwan University)

Abstract

This paper studies how the capital market perceives brand name adoption. I distinguish between brand adoption and radical type of corporate name change. A brand adoption name change occurs when the firm adopts one of its well-established brands as its new corporate name and a radical type occurs when the new name is semantically unrelated to firm history. Improved profitability and increased net investment accompany brand name adoption. After controlling for changes in the competing information sources, the accompanying improved economic performance, and the endogeneity of the decision to adopt a brand name, I find that, while there are no intertemporal variations in the cost of capital for a radical name change, a brand name adoption is associated with a lower cost of capital following the name change, suggesting that brand reputation is a valuable asset.

Suggested Citation

  • YiLin Wu, 2011. "Brand Reputation and the Cost of Capital: Evidence of Adopting a Brand Name as the Corporate Name," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 15(2), pages 29-63, Winter.
  • Handle: RePEc:pep:journl:v:15:y:2011:i:2:p:29-63
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    References listed on IDEAS

    as
    1. Jay Pil Choi, 1998. "Brand Extension as Informational Leverage," Review of Economic Studies, Oxford University Press, vol. 65(4), pages 655-669.
    2. William R. Gebhardt & Charles M. C. Lee & Bhaskaran Swaminathan, 2001. "Toward an Implied Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 39(1), pages 135-176, June.
    3. Wu, YiLin, 2010. "What's in a name? What leads a firm to change its name and what the new name foreshadows," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1344-1359, June.
    4. Mary E. Barth & Ron Kasznik & Maureen F. McNichols, 2001. "Analyst Coverage and Intangible Assets," Journal of Accounting Research, Wiley Blackwell, vol. 39(1), pages 1-34, June.
    5. Michael J. Cooper, 2001. "A Rose.com by Any Other Name," Journal of Finance, American Finance Association, vol. 56(6), pages 2371-2388, December.
    6. 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.
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    More about this item

    Keywords

    Cost of Capital; Brand; Discount for Lack of Brand;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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