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Underestimated Investment Advice: Check Trademark Documents

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Trademark applications can serve as a valuable indicator for investors, says the new study.

If you compare companies based on the number of trademarks they register per year – compared to total assets – these are the shares of companies that register more trademarks that perform better next year, ahead of shares of companies that registered less, according to the study. , which was recently published in Management Science.

Trademarks are sought when companies represent names, logos, colors, or symbols that distinguish a product or business brand. They offer legal protection for the goods and brands in question and are used to secure future profits, market prices and long-term prospects, says Sue Hong Theo, a professor of accounting at UCLA’s Anderson School of Management and co-author. research.

Companies that produce more new products and have more trademark registrations, compared to total assets, have much higher future profits, says Professor Theoh.

“Trademark Intensity”

The researchers focused on 305,422 registrations between 1976 and 2014. measured each company for its “trademark intensity” – a ratio that represents the annual number of its trademark activities in a calendar year divided by total assets for the fiscal year ended last calendar year.

Next, to see if such a measure could predict stock returns, they created a hypothetical portfolio that buys stocks of companies that ranked the top third in trademark intensity over the past year and shorts stocks of companies that ranked the bottom third in trademark intensity.

The researchers found that between 1977 and 2015, the use of this trading strategy yielded an annual return on average about 7.8 percentage points higher than the return of a portfolio trading stocks with a similar risk profile excluding trademark applications.

This advantage persisted over time, even as high- and low-intensity companies changed. As the company’s trademark intensity increased from the lowest third to the highest third, its return on assets and return on equity next year rose by 1.88 and 5.08 percentage points, respectively.

Missed chance

Researchers have found that this promise of higher returns in the future is generally missed or underestimated by stock analysts. And because many investors rely on analysts ’earnings forecasts, the article says,“ we expect investors to just as incorrectly estimate ”trademark intensity. Professor Theo says that for her, this suggests that an investor who buys high-intensity trademark shares at the time of trademark registration will receive higher returns than investors who expect the analyst to accept that registration.

The findings also suggest, according to researchers, that the Securities and Exchange Commission and accounting regulators should consider including fair value estimates of new and existing trademarks in their balance sheets or as additional disclosures. Currently, firms do not report the value of their domestic trademarks in their balance sheets.

Nowadays, it would be difficult for an ordinary investor to track trademarks and “understand who will win in the market,” says Professor Theo. Her co-authors of the study are: Professor Po-Xuan Xuan, Qing Hua National University; Professor Dongmei Li, University of South Carolina; Professor Kevin Lee, National Taiwan University; and Professor Qin Li, Hong Kong Polytechnic University.

Mrs. Maxie is a writer in Union City, New Jersey. You can contact her reports@wsj.com.

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