What’s in a Name? Maybe an IPO’s Fortunes
In stock offerings, the name of the game may be in ... the name.
Companies with easy-to-pronounce names and simple stock ticker symbols perform significantly better right after initial public offerings than do firms whose names are a mouthful, according to a study published today in the Proceedings of the National Academy of Sciences.
Investors have little information to go on when a company goes public, the study said, so a simple name or symbol can provide a mental shortcut.
“People are not entirely rational,†said Danny Oppenheimer, professor of psychology at Princeton University. “For investors and economists trying to model financial markets, it is important to take into account that market fluctuations are ultimately driven by people.â€
Oppenheimer and graduate student Adam Alter first created a series of fictional companies and asked undergraduates to trade based solely on company names. They found that the stocks of easier-to-say company names outperformed others.
The pair then examined real trades of randomly chosen securities on the New York Stock Exchange and the American Stock Exchange from 1990 to 2004 a day, a week, six months and one year after a company’s IPO. Results suggested people were more likely to buy the stocks of companies with simple names and ticker symbols.
The study noted that Carlsbad, Calif.-based Callaway Golf Co., with the easily pronounceable ticker symbol ELY, jumped 62% on its first day of trading, whereas Scottsdale, Ariz.-based Medicis Pharmaceutical Corp., with ticker symbol MRX, fell 50% on its first day.
But Oppenheimer warned against relying on names in the long term.
“Markets tend to correct themselves in the presence of new information,†he said.
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