Brand Equity and Debt Diversification

ABSTRACT This study examines how brand equity influences the diversity of firms’ debt structures. We propose that brand equity, by signaling larger and more stable future cash flows and greater product market awareness, alters the fundamental trade‐offs that drive optimal debt type diversity. Specifically, strong brand equity may enable greater debt diversity by reducing the costs of creditor coordination failure and reducing the firm's exposure to lender‐specific shocks. Using trademarks to proxy for brand equity, we find a robust positive relationship between brand equity and debt diversity. Quasi‐natural experiments support a likely causal interpretation of this effect. Cross‐sectional tests further reveal that the relationship is more pronounced for firms facing greater information asymmetry and heightened product market competition. Our results are robust to alternative measures of brand equity and debt diversity.