A Rose.com, or Not

In a another post, I described how the initial good or bad feelings (called ‘affect') about a company or investment impact an investor's belief about its risk and expected return.

What if companies could manipulate your feelings about them? One example is a name change. Michael Cooper and Raghavendra Rau (with others) examined firms that changed their name to a ".com" name, implying an Internet focus. For example, in 1999, Computer Literacy, Inc. changed its name to Fatbrain.com. Why would a company change its name like this? How do investors react? Well, in 1999, a dotcom name likely invoked a good feeling and put the stock within the Internet mania of the time. Indeed, the day the rumor came out about the name change, Computer Literacy's stock price rose 33%!

In the 95 changes to dotcom names studied, some were already pure Internet companies. Some of the firms had some Internet presence or were signaling a change in focus to the Internet. Interestingly, ten firms did not have core business that was Internet related at all. The average return for the name-change sample upon the announcement was over 20%. The return was 42% higher after six months than other Internet firms. It was even higher for the firms with no significant Internet presence!

A few years later, the dotcom mania had passed. A dotcom name no longer evoked a positive affect. Indeed, after the crash of the dotcom stocks, those names might have induced a negative effect. During the dotcom bust period, they studied 67 firms that change their name away from a dotcom name. These firms earned an average 8% return on the news of their name change.

It appears that some company managers may play on the affect of investors in mania and bust periods by changing their name to align with general investor sentiment. Of course, in the end, it is the investors that let affect influence their decisions that make this manipulation successful.

Know any name changes that might be playing on our affect?

(See Michael J. Cooper, Orlin Dimitrov and P. Raghavendra Rau, 2001, "A Rose.com by Any Other Name," Journal of Finance, vol.56, 2371-2388, and Michael J. Cooper, P. Raghavendra Rau, Ajay Patel, Igor Osobov, and Ajay Khorana, 2005, "Managerial actions in response to a market downturn: Corporate name changes during the dot.com decline," Journal of Corporate Finance, vol. 11, 319-335.)