Abstract:
Trademarks are often registered when new products/services are launched commercially to protect intellectual property. We find that the number of new trademark registrations predicts significantly higher future profitability, higher stock returns, and more pessimistic analyst earnings forecasts. The return predictability cannot be explained by well-known factor models, is not priced in the cross section, and does not last beyond one year robustly. Investors react positively to trademark registration events, but insufficiently, given the positive return predictability. Using the Federal Trademark Dilution Act (FTDA) as an exogenous shock that enhanced trademark protection, we find that the trademark predictability was significantly strengthened during the seven years after the FTDA was enacted. The return predictability is stronger in harder-to-value firms: larger, more opaque, higher analyst disagreement, lower advertising expenses, and higher R&D spending; and in new product/service trademark categories. The return predictability is also stronger among industries with higher rates of oppositions to trademark registrations, a proxy of trademark value. Collectively, the evidence suggests that investors undervalue new trademarks, especially where analysts undervalue the trademarks and the cost to investors of paying attention is high.
