The Benefits of Collusion: Trademark Similarity and Comovement Performance

Abstract

Firms are different but also similar. We construct a novel measure of firm-by-firm pairwise trademark similarity to capture product market overlap. We find empirical support for the similarity-comovement relation: (1) trademark similarity can positively predict future profitability correlation; (2) trademark similarity is associated with higher comovement of excess return, and it is more pronounced among firm pairs with indirect industry linkages, high advertising expenses, and large growth stocks in the long term; (3) a possible explanation is proposed: firms tend to collude with their peers by adopting similar corporate actions so as to realize economies of scale while sharing potential risks, as reflected in higher cost efficiency, higher operational profitability, and lower risk exposure. Overall, firms are rivals but also friends.

Keywords: Trademarks, Trademark Similarity, Textual Analysis, Comovement, Collusion

JEL Classification: C81, G10, L10, L20, O34