Brand Perceptions and the Market for Common Stock Laura Frieder

Brand Perceptions and the Market for Common Stock This paper investigates the effect of company brand perceptions on investor incentives to hold stocks. We find that, after controlling for other postulated determinants of stockholdings, there is a negative and significant cross-sectional relation between percentage institutional holdings and brand visibility. This result is consistent with the notion that individual investors prefer to invest in stocks with easily-recognized products. Furthermore, we find that institutional holdings are positively related to firm size and beta. These results are intertemporally stable. Our analysis supports the notion that institutional portfolios eschew the relatively neglected small firm sector, whereas individual investors prefer holding stocks with high recognition and consequently, greater information flows and smaller parameter estimation risk. The analysis contributes to our understanding of how investors form their equity portfolios. An important concept in marketing is the role of brand value or brand equity. Kotler (2000) describes the concept of “brand” as follows: A brand is a name, term, sign, symbol, or design, or a combination of them, intended to differentiate the goods or services of one seller or group of sellers and to differentiate them from those of competitors. He adds that “the most enduring meanings of a brand are its values, culture, and personality.” For years, marketing scholars have recognized the importance of maintaining a brand presence and cultivating a brand awareness in order to induce consumers to develop loyalty to a company’s products. In this paper, we conduct a first exploration of whether brand perceptions of companies’ products spill over to investment decisions in the market for companies’ stock. A recent incident (March 2000) raises the possibility that branding may be more important in finance than was previously believed. Specifically, in the first few days after Palm was spun off from 3COM, it was priced by the market at a high level relative to 3COM’s valuation before the spinoff. An important factor in the purchase appears to be the satisfaction obtained from holding stock in a company with a brand-name product (Palm Pilots). A number of other companies have either spun off or contemplated spinning off divisions with strong brand recognition or have issued tracking stocks of such divisions. Examples are the spinoffs of Nabisco by RJR, of Kraft by Philip Morris, and of Borders by Kmart; more recently, Volkswagen has considered spinning off Audi. See Lamont and Thaler (2003) and “Deals and Deal Makers: Palm Soars as 3Com Unit Makes Its Trading Debut,” by Scott Thurm, Wall Street Journal, March 3, 2000, p. C20. See “Target Stock is Under Fire from Investors,” by Susan Pulliam and Steven Lipin, Wall Street Journal, May 11, 1995, p. C1, “Kraft Offering Priced at $31, Above Estimate,” by Floyd Norris and Greg Winter, New York Times, June 13, 2001, p. C1, and “Volkswagen Would Consider Audi Spinoff to Boost Shares and Discourage Takeovers,” by Scott Miller, Wall Street Journal, May 25, 2001, p. A3.