“Brand Equity – A Study on the relationship between brand equity and stock performance”.

In today’s competitive market companies aim at increasing revenue to acquire a higher market share. Previous research indicates that this can be achieved with intangible assets. These assets are described as a firm’s dynamic capabilities, which can be attained through knowledge resources, organizational structure, employee skills, customer size, Research and Development (R&D), innovative capability, market share or a recognizable brand. Previous studies have associated intangible assets to be very significant for a company’s success and even associated them with creating GDP growth, specifically in Nordic countries. Studies indicate an increasing gap between a company’s market value and book value, which is related to the constant omission of intangible assets from the balance sheet. As a result, this gap, according to previous research, attests that markets are not fully efficient and stock prices do not reflect all available information. Internally generated brand equity is among the assets omitted from the balance sheet. Brand equity is one of the most powerful intangibles within a company. Therefore, it has been alleged of generating higher returns. Due to current accounting standards, IAS 38, internally generated brands are not disclosed on the balance sheet. Instead, the standard solely permits externally generated brand equity, which arises during business combinations, to be recognized. Consequently, researchers are questioning the value relevance of accounting because the omission of internally generated brands does not provide accurate information about a company’s true value. As a result, this may create information asymmetry between management and investors. Since investors are interested in a company’s value, the omission of intangibles may lead to poor economic decisions. Numerous studies have addressed the relationship between intangibles and stock returns. However, there is little research that explains brand equity’s relationship to stock performance. Only one study on Turkish brands, by Basgoze et al (2014), managed to address this relationship. However, the authors only concentrated on abnormal returns and not on significant performance ratios like MTBV, ROA, EPS, P/E and ROE. Considering that the study was based on Turkish brands, a research gap was found in addressing the relationship between brand equity and stock performance in Nordic countries. Seeing that these countries highly invest in intangible assets more than any other European country, it further increased curiosity on the relationship between brand equity and stock performance. To address the gap, a quantitative study in the form of Spearman correlations and a linear regression analysis was conducted. The research design of the study placed brands as an independent variable and stock performance variables as dependent variables. As studies have stated that the MTBV-gap disproves claims of markets being fully efficient, theories like EMH and AHM have been used to analyze the relationship between brand equity and stock performance. Other theories used in the analysis was about brand equity and its different sets, a self-constructed definition of stock performance which included MTBV, ROE, ROA, EPS, P/E and stock returns. The results of the study showed that brand equity had a positive relationship with three out of the six included variables in the study, meaning that there was a positive relation. Furthermore, the study also showed that the market is not fully efficient since the results indicated that, due to brand equity not being included on the balance sheet, not all available information is included in stock prices. Therefore, investors will adapt to the current conditions of the market, which is in accordance to the Adaptive Market Hypothesis.