Brand equity and corporate debt structure

We use the firm's stock of trademarks and their ages to compute proxies for brand equity. We find that firms with more brand equity have lower equity and asset volatility and higher cash flows. Although suggestive of greater debt capacity, we find that firms with high brand equity use less debt...

Full description

Saved in:
Bibliographic Details
Published in:Journal of business finance & accounting 2022-07, Vol.49 (7-8), p.1077-1112
Main Authors: Mauer, David C., Villatoro, Natalia, Zhang, Yilei
Format: Article
Language:English
Subjects:
Asymmetric information
Brand equity
Brands
Companies
Corporate debt
debt structure
Enactment
Equity
Leverage
limited contractability
Maturity
pecking order
Trademarks
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We use the firm's stock of trademarks and their ages to compute proxies for brand equity. We find that firms with more brand equity have lower equity and asset volatility and higher cash flows. Although suggestive of greater debt capacity, we find that firms with high brand equity use less debt. Further, brand equity has no influence on debt maturity. We provide evidence that the relation between brand equity and leverage is causal, using the enactment of the Federal Trademark Dilution Act in 1996, which exogenously increased the value of famous brands and significantly decreased the leverage ratio of firms with famous brands. This negative effect on leverage is weaker for firms with high business risk and low information asymmetry, and stronger for firms with collateralized trademarks. We argue that the negative effect of brand equity on leverage is more consistent with a pecking order mechanism than with a limited contractability mechanism.
ISSN:0306-686X
1468-5957
DOI:10.1111/jbfa.12597