Tuesday, April 23

What’s in a name? actually quite a lot

Shakespeare said…

"What's in a name? That which we call a rose
By any other name would smell as sweet."

Romeo and Juliet (II, ii, 1-2)

But poor man was living in a different world, nowadays, the name of the company has a big impact on its performance. See this paper.

Research from psychology suggests that people evaluate fluent stimuli more favorably than similar information that is harder to process. Consistent with fluency affecting investment decisions, we find that companies with short, easy to pronounce names have higher breadth of ownership, greater share turnover, lower transaction price impacts, and higher valuation ratios. Corporate name changes increase fluency on average, and fluency-improving name changes are associated with increases in breadth of ownership, liquidity, and firm value. Name fluency also affects other investment decisions, with fluently named closed-end funds trading at smaller discounts and fluent mutual funds attracting greater fund flows.

An example that they quote is:

Practically speaking, when choosing from among drug manufacturers, people could instinctively feel more comfortable investing in a name such as “Forest Laboratories” than the less fluent “Allergan Ligand Retinoid Therapeutics.”

Hmmm, i wonder what that will mean to the financial institutions that i know and love? lol

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