The Value Relevance of Brand Assets Recognized by UK Firms

This study examines whether managers discretionary valuations of intangible assets are relevant despite contracting incentives to over-state them. We do so by examining the value relevance of brand assets recognized by 30 UK firms beginning in 1985. Our study adds to the literature on the value-relevance of intangible assets by examining valuations of managers who could be subject to contracting incentives, rather than of outside parties. We add to the evidence on managers? discretionary (re)valuations by explicitly partitioning the sample on measures of contracting incentives, and by examining a situation where contracting incentives are likely strong. Our results suggest that brand values recognized in financial statements are associated with values capitalized in stock prices, and with future net income, even for firms with the greatest contracting incentives firms affected by the London Stock Exchange (LSE) rule requiring shareholder approval for acquisitions/disposals, and high-leverage firms. These findings are robust to several sensitivity checks. We also find modest evidence that contracting incentives have an effect on value-relevance the coefficient relating brand assets to market values are higher for firms without any transactions that avoided the LSE rule.