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How your brand can affect your share price

It is well known that a strong brand tends to equate with strong financial value. But what particular variables affect this relationship?

This was the starting point for a piece of work co-authored by Marie Dutordoir, professor of finance. Drawing from branding theory, the authors hypothesised that stock price reactions to brand value changes are more positive for firms with high cash flow vulnerability, valuable growth opportunities, and high potential for further product or service price increases.

Analysing more than 500 brand value announcements by US companies which appeared in Interbrand’s Best Global Brands lists from 2001 to 2012, the study found evidence of significant abnormal stock returns on the days of announcements.

As Marie commented: “We pinpointed exactly when the Interbrand ranking was published and then looked to see what happened that very day to the stock prices of companies which appeared in the list. We took particular care to ensure than the company didn’t publish any other statements on the day the ranking was published so that we could be sure of the link between brand value and their share price. If they did publish other statements then they were excluded from our exercise.

“What we found was that it wasn’t the fact that the company appeared on the list which determined the movement in share price, but whether or not the company had gone up or down in the overall rankings and how the company’s ranking had changed year on year.”

Given that the last four years of data stretched into the onset of the global economic recession, the authors were also able to assess the impact of brand value during a downturn. Added Marie: “What we found was that a strong brand tended to act like a cushion, sheltering companies from the worst effects of the economic crisis with shareholders valuing the potential of brands to reduce cash flow vulnerability to adverse shocks. In some respects this goes against the thinking that in times of crises people tend to choose cheaper or maybe weaker brands, when it appears that the opposite actually happens. Companies need to be getting as much as possible out of their brands.”

Marie now plans follow up projects using social media data to capture brand value.