The Impact of External Parties on Brand-Name Capital

September 28, 2007

Economic Inquiry

On September 30, 1982, Johnson & Johnson announced that three people had been killed as the result of ingesting cyanide-laced Tylenol capsules. Four more Tylenol-related deaths were reported within the next two days. Culminating in 125,000 stories in the print media alone, the poisonings were an event without precedent in American business. The Tylenol brand received over $1 billion in adverse publicity.

As a result, many analysts claimed the brand was dead. But the company president, James Burke, ignoring the advice of government officials and even some of his close associates, decided to spend millions to revive Tylenol. The general opinion today is that Johnson & Johnson and Tylenol made a prodigious comeback, one unparalleled in American business.

The event provides an opportunity to study the effect that an external party can have on the brand name of reputation of a firm. That is, to what degree does a firm’s brand name suffer a loss in value when the firm clearly did not intentionally lower product quality? Do consumers hold firms responsible for the damaging actions of parties not associated with that firm? This study attempts to resolve these issues.

An examination of Johnson & Johnson’s stock price shows that the company’s market losses far exceeded direct costs and losses shared by other pain-reliever producers; this evidence provides support for the Klein and Leffler [1981] theory of brand names as quality-assuring mechanisms. Other pain relievers poisoned by copycat killers had a much lower level of brand-name capital to lose.



  • AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which AQR.com has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.

  • The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees.

    This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.

  • Certain publications may have been written prior to the author being an employee of AQR.