Trademark Activity and the Market Performance of U.S. Commercial Banks
Gonzalez-Pedraz, Carlos, Mayordomo, Sergio, Journal of Business Economics and Management
Banks innovate and respond to customers' initiatives and needs by offering new products and services, yet few of these innovations are patentable. Rather they are quite easy for other banks to imitate or replicate. How then can innovative banks protect their innovations? According to Teece (1986), banks should control complementary assets, such as marketing or distribution channels. In reality, commercial banks are undertaking significant investments in marketing and advertising; in 1999, they spent $5.1 billion on advertising and marketing, equal to an estimated 8.9% of their net income before taxes (Ors 2006). Furthermore, Ors (2006) reveals that advertising has a positive and economically significant impact on bank profitability and considers advertising an important element of bank competition that is linked to ownership of relevant portfolios of trademarks. A trademark--any sign that helps distinguish a product or service, whether a word, a figure, or an image--thus is closely related to advertising and the intangible value of the firm.
Marketing strategy is one more of the set of strategic tools that firms may use to generate cash flows. The value of the future cash flows will be reflected in the bank market value. Poor trademarks strategies or weak marketing campaigns could lead to poor sales performance of the firm services. Given that the shareholder wealth can be viewed as the discounted value of expected cash flows, a revision of these expectations based on cancellation or introduction of trademarks could be manifested in the firm's stock price or even in a longer term bank performance.
In the retail banking sector, innovations also might relate to trademarks. In Rindova and Petkova's (2007) theoretical framework to explain the interaction of technological innovations with consumer perceptions, innovation enhances value creation but may not be perceived clearly by the demand side. Yet in retail banking, demand often changes before innovations appear. That is, customers' habits change first (e.g., Internet access), then banks introduce innovations to cope with these changes (e.g., online banking), which they also might trademark.
The study here investigates the link between trademark activity and the performance and the stock prices of U.S. commercial banks. The focus centers on the value added by trade--or service marks owned by the main U.S. commercial banks between 1996 and 2006, because trademarks can alter the market value of the firm, which in turn influences how investors perceive firm value. The study concentrates on commercial banks because, whether out of necessity (e.g., new segments of customers) or merit (e.g., new forms of competition), the financial sector has become an increasingly innovative industry.
Therefore, this paper estimates the impact of several explanatory variables related to banks' trademark activity on Tobin's q (Tobin 1978). Tobin's q, that is, the ratio of the market valuation of financial claims relative to the cost of replacing the firm's assets has been used widely to assess profitable investment opportunities. The firms represent a set of assets and capabilities, such as knowledge, brand names, trade--and service marks, and other intangible factors, that get jointly valued on the market (see the seminal works of Grilliches (1981); Megna and Klock (1993); and the recent study of Krasnikov et al. (2009). This empirical study here focuses on the effect of specific characteristics of firm's trademark portfolio, such as age and scope, on firm's Tobin's q. Further implications about the firm's branding effort and readjustments of business strategies can be inferred at the light of the results.
Using quarterly data, the study here finds that an older portfolio of trademarks diminishes the ratio of market value to firm assets, though firms can improve this ratio by abandoning old trademarks. Also, trademarks with low ranges or application scopes add more value to the firm, in terms of a higher Tobin's q, than do trademarks with wide ranges. …