“The researchers found that analysts consistently undervalue companies with significant numbers of trademark registrations in the analysts’ earnings forecast.”
Brands — legally protected as trademarks — have value. We all understand that intuitively. Registering brands as federal trademarks also provides significant legal benefits, such as the presumption of ownership, validity, and nationwide priority in the mark. According to a recent study, the number of trademarks a company registers in a given year helps predict that company’s profitability and stock returns for the following year.
- Researchers looked at stocks of public companies who registered a large amount of U.S. trademark applications in a year, relative to their assets
- They compared those stocks to those of companies who registered a small amount of U.S. trademark applications in a given year
- The companies with a higher ratio of trademark registrations yielded higher profitability and stock return value over the next 12 months
Of course, securing a federal registration for a trademark through the U.S. Patent and Trademark Office (USPTO) has a cost: According to an American Intellectual Property Law Association (AIPLA) annual member survey, in 2021, the average reported cost of registration for a two-class, use-based application was $2,782. (AIPLA 2021 Report of the Economic Survey, American Intellectual Property Law Association, I-92.) The appetite for such federal marks keeps increasing. For instance, the number of trademark applications each year continues to rise, increasing from 594,107 applications in 2017 to 943,928 applications in 2021.
While we know the value is there, and companies are investing in registering their key brands as federal trademarks, demonstrating tangible return can be tricky. For instance, trademarks do not have a ready market, and it can be difficult to measure how brand recognition impacts business revenue.
Enter this study, published in Management Science, which presents evidence of the positive correlation between trademark registration and the stock value of the enterprise.
- The researchers examined more than 300,000 trademark registrations issued by the USPTO from 1976 to 2014
- They measured each company for its “trademark intensity” — the number of trademark registrations in a given year divided by the company’s total assets in that year
- The researchers devised three portfolios — high trademark intensity, medium trademark intensity, and low trademark intensity
- They also constructed a hedge portfolio that “bought” shares of companies that ranked high in trademark intensity and shorted companies that ranked low in trademark intensity
The hedge portfolio yielded an annualized excess return of 5.2% and annualized alpha of 7.8%, 7.0%, and 6.3% from the Fama-French five-factor model (Fama and French, 2015), the q-factor model (Hou et. al., 2015), and the mispricing factor model (Stambaugh and Yaun, 2017), respectively.
This is the first study we have found to examine the predictive value of U.S. trademark registrations on stock returns. As it stands, companies do not typically separately report the value of their trademarks registrations on their balance sheets and are not required to treat internally developed trademarks as assets with their own valuation (although companies often do report their patent pool and associated valuations). This lack of reporting trademark valuations leads to analyst errors in predicting stock value, according to the study.
The researchers found that analysts consistently undervalue companies with significant numbers of trademark registrations in the analysts’ earnings forecast. The average analyst forecast erred significantly more when forecasting stock value of companies with higher intensity trademark registration ratios. Further, analysts undervalued stock with even greater error when the trademark registrations 1) appeared in new USPTO categories; and 2) triggered more oppositions from competitors, suggesting these factors may indicate even greater economic value.
A Compelling Signal of Value
The researchers suggest the study shows that higher ratios of new trademark registrations serve as a compelling signal of promising innovation and new products and services, leading to higher sales and, thus, higher future profits. Companies and executives can now see tangible evidence that investing valuable resources to secure trademark registrations delivers more than commensurate value.
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