Bringing Innovation to Fruition : Insights from New Trademarks

In this study, we build a novel comprehensive dataset of 123,545 product trademark registrations by S&P 1500 firms to capture firm-level product development. We provide evidence that new product development contains valuable information about future firm fundamentals and predicts increases in future sales and profitability; one new trademark produces $1.85 million additional sales for a median firm in a low-patent (non-high-tech) industry. Firms appear to understand the value of product development innovation and since this activity is risky, firms motivate it with risk incentives in compensation. We find that new product development is increased in firms where the CEO compensation structure exhibits a higher fraction of stock options, higher convexity of incentives, and higher value of unvested options. Using a revised accounting rule, SFAS 123(R), as an exogenous shock to option compensation, we find that reductions in stock option compensation cause reductions in new product development. Our evidence is consistent with product development innovation representing a major firm objective and with the OECD definition of innovation including new trademarks