Trademarks and Entrepreneurial Firm Success: Theory and Evidence from Private Firm Exits and Initial Public Offerings

Abstract

We analyze, theoretically and empirically, the role played by trademarks in the financing and performance of startup firms, for the first time in the literature. We first show theoretically, in a setting where firm insiders have private information about product quality and obtaining trademarks is costly, that trademarks increase firm operating performance (play a “protective role”), and allow them to convey information about intrinsic firm value to outside investors (play an “informational role”). Based on our model predictions, we develop testable hypotheses relating the number of trademarks held by private firms to the amount and staging of venture capital (VC) investment in these firms, their probability of successful exit (IPO or acquisition), IPO and secondary market valuations, institutional investor IPO participation, post-IPO operating performance, and post-IPO information asymmetry. We test these hypotheses using data on VC investment in private firms, private firm exit, and on initial public offerings and find supportive evidence. We conduct an IV analysis using the leniency of trademark examiners as the instrument and show that the above findings are causal.

Keywords: Trademarks; Initial Public Offerings (IPOs); Valuation; Private Firm Exit; Post-IPO Operating Performance

JEL Classification: G23, G24, L26, O34