Events

Brand recognition and the contribution of key talents jointly form firms’ customer capital as a form of intangible assets embodied in the customer base. The brand-based customer capital is immune to firm’s liquidity risk, whereas the talent-based customer capital is fragile to liquidity risk as key talents tend to leave the firms taking the talent-based customer capital away and causing ex-ante inefficient loss for the firm when the firm is financially stressed. Further, the brand-based customer capital imposes an operating leverage, because firms need to pay rents to key talent to retain the talent-based customer capital. Particularly, the uncertainty shock increase firms’ liquidity risks, and thus the brand-based customer capital provides a hedge to heightened uncertainty relatively to talent-based customer capital. The heterogeneous exposures to uncertainty shocks are priced in the cross section. Our model predicts that firms with a lower brand-talent ratio (BTR) have higher expected returns. Our model also predicts that low BTR firms are more likely to adopt precautionary financial policies and they experience more turnovers of key talents. Using proprietary customer survey data, we construct the BTR measures. The empirical findings provide strong support to the predictions of our model.