Trademarks and the cost of equity capital

Abstract

Employing a sample of 4655 U.S. public firms from 1993 to 2017, we document robust evidence that firms with more registered trademarks have a lower cost of equity. We further show that the equity financing cost is lower for firms with better-protected trademarks in difference-in-differences estimation based on the enactment of the Federal Trademark Dilution Act in 1996. In addition, our analysis reveals that the effect of trademarks on the cost of equity is achieved through the informational channel, the disciplinary channel, and the stabilizing cash flow channel. These results suggest that trademarks play an important role in alleviating the equity financing cost, thus clarifying the underlying mechanism that brand equity creates value.