Brand Capital and Leverage Adjustments

Abstract

Using a sample of U.S. firm‐year observations, we document a positive association between brand capital and the speed of leverage adjustment. This relationship is stronger among firms that exhibit greater opacity in their information disclosure, weaker governance, and more rigid financial constraints. The results are consistent with the view that brand capital is associated with lower adjustment frictions through information signalling and reputational monitoring. The relationship is also more pronounced among overleveraged firms. Finally, we find some evidence that leverage adjustments are associated with greater future firm value among firms with higher brand capital.