A Sneaky Way Companies Boost Their Stock Price
There are some obvious ways for a company to become more valuable. It might introduce a new, high-margin offering. It might spend more on effective advertising. It might build more factories to meet rising demand.
Or ... it might simply change its name.
From Dot-com to Not-com
Researchers Nhut H. Nguyen and Yubo Liu studied corporate name changes between 1978 and 2008, and found that companies that change their names tended to see their stock rise. As the abstract for the paper puts it, the companies "earn significant abnormal returns of 1.41% for the three days around the announcement date." The abnormal return was around 3.58% for the several months surrounding the change.
The effect of name changes was far more pronounced during the Internet bubble days. Researchers Michael Cooper, Orlin Dimitrov, and Raghavendra Rau -- in a study titled "A Rose.com by Any Other Name" -- found an average five-day jump of 53% for companies that changed their names to an "Internet-related" name, and an increase of almost 90% over a two-month period surrounding the change.
Interestingly, the stock boost occurred regardless of whether the company actually started doing anything Internet-related. (1-800-Flowers.com added the dot com before its IPO.) Researchers also found that stock prices got a boost when companies removed "dot.com" from their names after the bubble burst. Notice how Zillow (Z), nee Zillow.com, removed the dot-com suffix before its IPO?
With the Internet bubble and blow-up behind us, there are still plenty of corporate name changes happening.
The company you until very recently knew as World Wrestling Entertainment is now WWE (WWE). That change helps the company expand beyond just wrestling and ties it in with its new WWE cable network. In a similar fashion, Apple Computer changed its name to Apple (AAPL) back in 2007, reflecting the company's growing involvement in areas beyond personal computers.
And it's not just companies that change their names. Mutual funds do, too, typically to capitalize on hot new investing styles, or to remove references to passé old ones. Researchers Michael Cooper, Raghavendra Rau, and Huseyin Gulen found that funds got a similar boost from rebranding: "The year before a fund changes its name to reflect a current hot style or moves away from a current cold style, the fund experiences an average excess outflow of approximately -5%. The year after the name change, these funds earn average cumulative excess flows of 30%, despite no increase in performance compared to their pre-name change performance."
What Scandals? What Negativity? That Was That Other Company
Sometimes companies change their names to distance themselves from problematic issues.
- Philip Morris, for example, rebranded itself as Altria (MO). Thus, within the U.S., the company's image is less immediately connected to tobacco and Philip Morris's history, although its Philip Morris International (PM) spinoff retains the historical name. (At the time, someone joked that lung cancer would be changing its name to Philip Morris.)
- Tyco Electronics, linked by name to former Tyco International CEO Dennis Kozlowski and his many excesses, such as a $6,000 shower curtain, has now changed its name to TE Connectivity (TEL).
- The Yum! Brands (YUM) fast-food franchise we now know as KFC was known as Kentucky Fried Chicken not so long ago. The new moniker distances the company from unhealthy associations with the word "fried" and also makes it able to sell grilled chicken less illogically.
There aren't always obvious reasons for corporate name changes. Ann Taylor recently changed its name to Ann (ANN), causing some to scratch their heads. The company explained that it's keeping its Ann Taylor stores, and the new name will encompass the old one as well as separate businesses such as its Loft stores and outlets.
For similar reasons, Manpower is now Manpower Group (MAN), reflecting an umbrella under which you'll find its flagship Manpower staffing business as well as others, such as Right Management and Experis. The company opted for the word "group" to underscore the human nature of its business.
"Googling" Was Almost "BackRubbing"
Almost as interesting as the new names that companies take on are some of the names that they let go.
Did you know, for example, that Google (GOOG) was once known as BackRub? It's hard to imagine it racking up the success it's had with such a name. (The name was based on the fact that Google's algorithm used backlinks in its searches.) A social network such as Google+ might be kind of creepy, if it were named BackRub.
What's NOT in a Name
The researchers' conclusion is one we should all keep in mind, for stocks and funds alike: "Investors are irrationally influenced by cosmetic effects."
As we seek great funds and outstanding stocks for our portfolios, we shouldn't be swayed by appealing names. Look beyond them to the underlying companies and their health, competitive advantages, and growth prospects.
Longtime Motley Fool contributor Selena Maranjian owns shares of Google and Apple, but she holds no other position in any company mentioned. You can see her holdings and a short bio here. The Motley Fool owns shares of Apple, Philip Morris International, and Google. Motley Fool newsletter services have recommended buying shares of Yum! Brands, Apple, Philip Morris International, and Google, as well as creating a bull call spread position in Apple.