The Predictive Power of Trademark Registrations for Investment Returns
Trademark registration meets investment strategy in a recent Management Science article, Valuation of New Trademarks. See Po-Hsuan Hus et al. (2002) Valuation of New Trademarks, Management Science 68(1):257-279. Mssrs. Po-Hsuan Hus et al. provide us valuable lessons, including: (1) trademark registration is key for business; (2) trademark registration has real and frequently underestimated monetary value; and (3) investors can use the trademark registration metrics to beat market returns.
The authors remind us of the importance of trademark registration for businesses. First, consumers rely on trademarked brand names in search and purchase decisions, especially where search costs and information asymmetry are high. Second, a registered trademark is a signaling tool that creates awareness, reduces information asymmetry about quality, and differentiates a brand from that of competitors. Third, a registered trademark confers market power to the registrant by allowing him or her to charge a price premium, which increases margin and overall profits. Fourth, trademark registrations reflect perfected legal rights used to prevent competitors from using similar marks and eroding market share. Fifth, registered trademarks can be equal in importance (as intellectual property assets) to patents, particularly in low-patent industries.
Lesson #2 – Trademark registration has real and frequently underestimated monetary value.
The authors assert that a company’s trademark registration intensity contributes substantially to business value, particularly as bestowed by the stock market. This value can be easily overlooked by financial analysts and investors because U.S. firms do not typically include the value of their intellectual property on their balance sheets; rather, these assets are shown as expenses on income statements as they are incurred.
Lesson #3 – Investors can use trademark registration metrics to beat market returns.
Investors can achieve higher returns (over market averages) by investing in companies with high measures of trademark registration intensity. The authors of the article focus on a metric they call TRAT, which combines the number of trademarks registered in a given year with the total assets of a company. They then construct a hedge portfolio of high TRAT companies (in long positions) and low TRAT companies (in short positions). The resulting portfolio has an α (alpha; return over market) of between 6.3% and 7.8%. This supports that a company’s trademark registration intensity in one year is a significant predictor of abnormally positive stock returns in the subsequent year. Translating this knowledge to actual investment returns is tricky for the layperson because it’s hard to assemble public data so as to identify high TRAT companies. Until someone comes up with a packaged investment vehicle here (which I imagine they will), there may still be some options. For example, investors can find some data sets for public companies filing the most international trademark applications. Theoretically, trademark applications should be leading edge proxies for trademark registrations—particularly for companies that are filing hundreds of them. For data miners, the USPTO also provides large data sets, including annual trademark applications current to the previous year. The total assets of a particular company should be more publicly available.
All of this may be a bit heady, but it’s definitely helpful for anyone looking for new types of quantitative evidence of the value of trademark registration and the competitive advantage of companies with trademark registration intensity. Theme music by the Black Keys.