A distinctive brand is good for business, of course. But you’d be surprised how important it is to a firm’s overall performance. We studied how customer perceptions of brand differentiation related to stock price over the course of 11 years in 275 “monobrand” companies such as AT&T, Krispy Kreme Doughnuts, and Reebok. (Customer brand-perceptions data came from Y&R’s Brand Asset Valuator survey.)

We divided the firms into two groups for each year: The first comprised those whose brands, customers felt, had become less differentiated. The second included those whose brands had become more differentiated. We then looked at differences between the companies’ annual risk-adjusted stock returns. Curiously, we saw no effect of changes in brand differentiation on stock returns in the years the changes occurred, but we did see a pronounced delayed effect: One year later, firms whose brands had become more distinct outperformed those whose brands had become less differentiated.

Specifically, the average next-year risk-adjusted stock return for firms with increased differentiation was 4.8%, while
the average for those with decreased differentiation was −4.3%. That brand enhancements improve stock price is not surprising. But the lagwe identified has important implications for companies. In simple terms, while individual consumers perceive differentiation directly and react in real time (buying more Coke, say, as marketing increases
differentiation), financial markets, it appears, don’t respond until they see the impact on earnings later on. The markets don’t seem to anticipate the future impact of improved differentiation – or perhaps they don’t recognize the change in differentiation in the first place.

Though managers often think their voluntary disclosures have little impact, it’s been shown empirically that disclosures, ranging from new product announcements to explanations of financial results, affect financial-market
outcomes such as share price, trading volume, and bid-ask spreads. If companies are to reap the full and immediate benefits of brand differentiation, managers need to do a better job of communicating their brand strategy (and its intangible outcomes) to the financial community.