How emerging market investors' value competitors' customer equity: Brand crisis spillover in China

Abstract

Brand crisis not only damages customer equity of the affected brand, but also spill over to non-affected competitors when perceived as guilty by association. Therefore, understanding about the indirect financial costs of brand crisis spillover is critical, because customer equity puts much emphasis on the bottom-line financial value. However, little is understood about financial costs to competitors associated with the spillover effect. This study investigates the spillover effect of brand crisis on non-affected competing firms' financial values in emerging markets. The main research questions address: (1) whether and how brand crisis spillover influences non-affected competitors' financial market values in emerging markets, and (2) how marketing strategies by rival firms prior to the crisis influence spillover effects on their financial values in emerging markets. The paper conducts an event study to investigate whether and how the stock values of rival firms within the same product category—food brands—are affected by brand crisis released in China from 2001 to 2011. The results show that rival firms report negative abnormal returns at the time of the brand crisis and furthermore, the harm varies depending on three marketing strategies before crisis. Specifically, advertising expenditures of rival firms strengthens, but charity donation (as signal of corporate social responsibility) and the product diversity of rival firms weaken the spillover effect of a brand crisis in a financial market. Accordingly, the findings have provided managerial implications and recommendations regarding future directions.