Trademark valuationand IPO underpricing

Trademarks like all non-tangible assets pose difficulties in assigning market values to them. This is an added strain for private firms. Therefore, firms with trademarks have a stronger incentive to start the initial product offering (IPO) process and subsequently be evaluated by the market. The intangibility of trademarks increases the asymmetric information effects on under pricing. Stockholders of firms owning trademarks however, expect to gain from the extended recognition of their products and services through the IPO, so perhaps they stand ready to accept higher under pricing ceteris paribus. Two important questions arise from the above. The first is to what extent the company and its product recognition matters in forming investors’ expectations for the company's stock and second how does the underwriter deal with firms which exhibit consumer-based loyalty.

The IPO under pricing literature encompasses numerous studies involving asymmetric information, institutional and behavioral explanations. In this context, we study the effect of trademarks and their value contribution on the extent of under pricing during the IPO. Employing a sample of US IPOs from 1997 to 2015 collected from the Securities Data Company (SDC), we find that the intangibility aspect of trademarks predictably increases under pricing. When however, the issuing firm chooses a prestigious underwriter, the firm succeeds in reducing under pricing. Following the Hall and Oriani (2006) approach in estimating the value contribution of trademarks, we investigate the extent in which this value contribution is augmented with the IPO. Finally, we use cross sectional regressions to investigate the effect of trademarks on IPO performance in the three years after going public. We find that firms with trademarks outperform those without. The coefficient on the dummy variable signifying at least one trademark is 24% for the buy and hold 3-year period and 30% for the 3-year capital adequacy rates (CAR). Our results pertaining to the trademark stock corroborate our previous results since one additional trademark increases 3 year CAR by 1,9% and the BUY and HOLD 3 year period by 2%.