A study recently published in Management Science entitled, “Valuation of New Trademarks,” finds that a public company’s new trademark registrations substantially contribute to the firm’s long-term valuation but are notoriously undervalued by analysts and investors. This conclusion is reflected in the study’s findings that public companies engaging in new trademark activity before the U.S. Patent and Trademark Office (“USPTO”) consistently exhibit higher subsequent profitability, analyst forecast errors, and abnormal stock returns.
As one of the first studies of its kind to highlight the effects of new trademark activity, researchers mined over 300,000 trademark registrations published by the USPTO from 1976 to 2014. The goal of the study was to look at the predictive value of new trademarks on a public company’s stock valuation.
The study found that the market does not efficiently price new trademarks. Specifically, the findings indicate a correlation between new trademark activity and:
- Higher Stock Performance. Public companies that register the most trademarks each year (relative to their total assets) had a higher stock performance, on average, in the next 12 months than companies that weren’t as active in new trademarks. New trademark activity also predicted significantly higher return on equity and return on assets. However, these outcomes are strongest only for the first year.
- Higher Analyst Forecast Errors. The average analyst forecast error was significantly higher among public companies engaged in new trademark activity compared with companies that were less active in registering trademarks.
- Greater Undervaluation of New Trademarks. On average, investors undervalue new trademarks, especially among more complex or hard-to-value firms, which are larger and have higher analyst dispersion, more R&D spending, and lower advertising spending. The undervaluation is stronger when new trademarks:
- are considered “exploratory,” possibly signaling a move into new categories, fields, or classes, which are harder to value; or
- are engaged in more opposition proceedings from competitors before registering, indicating the registration may be more valuable within its respective industry.
- Greater Predictor of Future Value and Profitability. New trademark filings contribute substantially to firm value and can be a key predictor of a firm’s future profitability, but even skilled financial analysts—and thus, the investors who rely on them—tend to underappreciate their relative value at the time of registration.
Based on these findings, the researchers suggest that the Securities and Exchange Commission (SEC) and accounting regulators should implement safe harbor rules to encourage public companies in the U.S. to provide more information regarding their firm’s new and existing trademarks in their reporting.
Valuing intangible assets, like patents, trademarks, copyrights, and trade secrets, is notoriously difficult due to various market-related complexities. To date, most of the research examining the predictability of a public company’s stock valuation has focused on patents. However, trademark protection reaches beyond the realm of patentable innovations. Trademarks are more common among companies seeking to differentiate their brand or to promote their unique products and services apart from those of their competitors.
Unlike a firm’s patent portfolio, new trademark activity is often undervalued and overlooked by financial analysts and the investors that rely on them. Unless and until the SEC offers additional guidance regarding how public companies should reflect trademark valuation in their reporting, investors should be particularly cognizant of a firm’s new trademark registrations when sizing up the competition.
For more information and a link to the full study findings, see Management Science: Valuation of New Trademarks.
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