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Brand Capital and Firm Value

  • Frederico Belo

    (University of Minnesota)

  • Xiaoji Lin

    (Ohio State University)

  • Maria Ana Vitorino

    (University of Minnesota)

We study the role of brand capital -- a primary form of intangible capital -- for firm valuation and risk in the cross section of publicly traded firms. Using a empirical measure of brand capital stock constructed from advertising expenditures accounting data, we show that: (i) firms with low brand capital investment rates have higher average stock returns than firms with high brand capital investment rates, a difference of 5.2% per annum; (ii) more brand capital intensive firms have higher average stock returns than less brand capital intensive firms, a difference of 5.1% per annum; and (iii) investment in both brand capital and physical capital is volatile and procyclical. A neoclassical investment-based model in which brand capital is a factor of production subject to adjustment costs matches the data well. The model also provides a novel explanation for the empirical links between advertising expenditures and stock returns around seasoned equity offerings (SEO) documented in previous studies. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2013.05.001
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 17 (2014)
Issue (Month): 1 (January)
Pages: 150-169

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