Trademarks and the Cost of Equity Capital

Abstract

Employing a sample of 5,858 U.S. public firms from 1993 to 2017, this study documents robust evidence that firms that hold more trademarks enjoy a lower cost of equity, even after we control for other determinants of the cost of equity and industry-by-year fixed effects. To address endogeneity issues, we employ three federal-level trademark laws affecting the extent of trademark protection—the Federal Trademark Dilution Act, Moseley v. V. Secret Catalogue, Inc., and the Trademark Dilution Revision Act—as quasi-natural experiments. Our analysis reveals that the impact of trademark registrations on the cost of equity is achieved through the information asymmetry channel, the investor recognition channel, and the disciplinary channel. These results suggest that trademarks play an important role in alleviating firms’ equity financing costs, thus clarifying the underlying mechanism through which firms benefit from holding trademarks.

Keywords: Trademarks; Cost of Equity; Intellectual Property

JEL Classification: G12, M41, O34