Trademark Protection and Dividend Policy: Evidence from a Quasi-Natural Experiment

Abstract

This paper examines how trademark protection affects corporate dividend policy using the Federal Trademark Dilution Act (FTDA) of 1996 as a quasi-natural experiment. We extend Miller and Rock's (1985) dividend signaling model to incorporate trademark protection, integrating signaling theory, agency theory, and life cycle theory of dividends. We predict that enhanced trademark protection increases dividend payments by improving cash flow stability and increasing market power, with stronger effects for firms with good information environments, high growth opportunities, and low retained earnings than for their counterparts. Our empirical results strongly support our predictions: firms with famous trademarks increased their dividend payments following FTDA's passage and reduced them after its subsequent nullification. Additional analysis shows that markets recognize these effects, as shown by the decreased marginal value of cash holdings for protected firms. Our findings demonstrate that intellectual property protection fundamentally alters corporate financial policies.