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There has been an absence of evidence, except for a few useful anecdotes, showing that quality programs and other brand-building efforts pay off. Our research shows that, in fact, brand building for 34 major U.S. corporations did pay off where it really counts in our system-for the shareholder.

Managers are under pressure to deliver results enhancing current-term financial measures. This pressure is largely driven by the need to meet shareholders' objectives and the realization that current-term financials affect stock price.

Often, however, strategies that enhance long-term competitiveness of the firm diminish current-term earnings. As a result, managers may be reluctant to undertake strategies necessary for long-term competitive success. One consequence of the focus on current-term results has been the dramatic shift in communication expenditures from advertising to promotion and a corresponding erosion in brand building.

Particularly in a period of margin squeezing and corporate downsizing, it is often difficult for managers to justify investments in intangible assets such as brand equity. A number of questions have to be answered. In particular, will creating and maintaining a strong brand identity pay off? Will investors appreciate strategies designed to enhance brand equity?

Our research now makes clear that changes in brand equity do affect stock return. Making use of the EquiTrend database created by Total Research Corp., we examined the extent to which brand equity provides information about firm performance that influences stock prices above and beyond that contained in current-term return on investment (ROI). The survey was conducted annually from 1989 to 1992 among 1,000 to 2,000 U.S. adults. Respondents were asked to evaluate the quality of various major brands in different categories, using an 11-point scale from 0 for unacceptable, poor quality to 10 for outstanding, extraordinary quality.

The EquiTrend brand-equity measure is calculated as the average of this perceived quality rating, weighted to reflect the percent of respondents who had no opinion.

We examined the association between yearly stock return and yearly brand equity changes for 34 companies. The accompanying chart shows the average stock return associated with yearly brand equity change quartiles and yearly ROI change quartiles, summarizing the results of our study.

We found, as widely acknowledged, that stock return is positively related to changes in ROI. Remarkably, we also find that changes in brand equity matter, too. While not quite as large as the response to ROI, our results depict a strong positive association between brand equity and stock return. Firms experiencing the largest gains in brand equity saw their stock return average 30%. Conversely, those firms with the largest losses in brand equity saw stock return average a neg-ative 10%.

One possibility is that changes in both brand equity and ROI provide the same or similar information about a firm's performance. This, however, does not appear to be the case. Relatively little association exists between changes in brand equity and changes in ROI.

These results suggest that the conventional wisdom-that the financial community downplays non-financial measures-needs to be examined closely. Investors can and do learn about changes in brand equity-not through EquiTrend studies (which has little exposure to the financial community) but by learning about a company's plans and programs. Stock market reaction to brand-equity shifts indicates investors view these changes as signals of future-term prospects. This, in turn, affects their stock appraisals.

This observed association between stock return and brand equity should be encouraging to those managers attempting to justify investments in brand equity, especially when tough questions are raised about the "bottom line." American business, long challenged to focus on long-term goals, must do more to communicate such strategies in a way the shareholders can appreciate.

The stock market, once given reliable indicators of this information, should react and come to rely less on shorter-term measures of business performance. In turn, managers will be freer to undertake strategies ensuring the long-term viability of their firms.

Mr. Aaker is professor of marketing strategy at the Haas School of Business, University of California, Berkeley, and author of "Managing Brand Equity." Mr. Jacobson is professor of business administration, University of Washington. This is derived from their article, "The Financial Information Content of Perceived Quality" in the May 1994 issue of The Journal of Marketing Research.

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