Trademark and IPO Underpricing

Abstract

While trademarks are mentioned in many firms’ IPO prospectuses, their influences on the IPO valuation process are underexplored. This paper studies the relationship between a firm’s pre-IPO trademarks and its IPO underpricing. Using 4,457 US IPOs during the period 1980-2018 we find that firms with a larger number of trademarks prior to the IPO date experience significantly less IPO underpricing. We employ a quasi-natural experiment brought about by the 1996 Federal Trademark Dilution Act and an instrumental variable approach to establish causality. Our findings suggest that trademarks help reduce information asymmetry among various IPO participants, leading to less underpriced IPOs.

Keywords: trademark; IPO underpricing; information asymmetry; product development

JEL Classification: G12, G24, G30, O34