Firm risk: a responsible business guide control to a better brand value and company value

Abstract

Brand equity constitutes an ample intangible asset for most entities, and previous research has developed various brand equity models that aim to optimize this asset. Most approaches rely on only a single factor, focusing on brand revenue or future cash flow. There is a need for extensive research on factors related to a firm’s financial risk including the effect of market share along with the intangible value of brand equity. This study identifies that the firm’s financial risk directly impacts brand equity value. This study aims to expand the literature by determining the important factors that affect brand value. To do so, financial information was collected from a list of publicly traded companies with evident major annual brand value and generic companies in the US and Europe. Using financial data, a statistical analysis was performed using correlation and regression to facilitate the identification of important variables that affect brand value. This paper aims to improve Damodaran’s model, which assigns values to intangible assets, by using the average sector as a proxy of a generic company. This approach helps to reduce the potential arbitrariness that can arise from the fact that the choice of a generic company might vary between sectors. This offers practitioners a simple method that can be used to determine a fair value for a branded company. The results suggest that a significant correlation exists between a firm’s brand equity and firm risk