Company Name Fluency, Investor Recognition, and Firm Value (Digest Summary)

The authors analyze the impact that a company’s or mutual fund’s name—in terms of fluency—has on pricing, volume, and liquidity. They find that name plays a significant role and that companies and mutual funds with “fluent” names fare better than others.

Companies with familiar names tend to have a higher level of retail and mutual fund shareholders, greater turnover, and lower transaction costs. Moreover, the authors find that because of a larger investor base and improved liquidity, stocks of companies with familiar names trade at a significant premium over companies with less fluent names.

Apart from analyzing the impact of companies’ names on stock prices and liquidity, the authors analyze the same impact for other investment vehicles, such as mutual funds. Their findings are similar. For example, fluently named mutual funds tend to attract more fund inflows, and fluently named closed-end funds also trade at a significant premium over less fluently named ones.

Overall, these are very important findings for investment practitioners because understanding drivers of firm value is important to understanding a company. A fund company or a fund manager can take advantage of investors’ preference for familiarity and fluency and increase firm value and fund performance by choosing a fluent name. Moreover, when picking stocks and mutual funds for investment, money managers need to look for companies and funds with familiar and fluent names, all else being equal.

Empirical findings suggest that investors prefer stocks of familiar and likable companies. The authors’ research builds on existing literature in psychology that found that fluent stimuli appear more positive than nonfluent stimuli. They extend that research with a hypothesis that investors will also have a preference for companies with fluent names.

Using data from CRSP and the US SEC’s electronic data gathering, analysis, and retrieval (EDGAR) tool to collect company names, the authors build a sample consisting of 14,296 companies, 18,585 unique company names, and 133,400 firm-year observations to measure the impact of company name fluency on stock prices.

Because fluency is a subjective concept, the authors use three distinct attributes to measure fluency: (1) length—the longer a company’s name, the less fluent it is likely to be; (2) Englishness—if the company’s name is English, it is likely to be more familiar; and (3) dictionary—if the company’s name is in the dictionary, it is likely to be more familiar.

To counter the argument that fluent names might be a proxy for other omitted variables (such as management quality), the authors substantiate their findings by analyzing companies that have changed their names from less-fluent to fluent ones. The results indicate that companies that have indeed renamed themselves and selected fluent names tend to increase their investor base and increase shareholder value after the name change.

This article is very useful, and the authors have done a commendable job of analyzing the impact of company and mutual fund names on stock prices and fund performance, respectively. Their research substantiates the general belief and perception that having the right name does matter. But as financial markets are becoming globally integrated and companies in such emerging markets as China, India, Brazil, Turkey, and Russia are being listed on major stock exchanges, more and more international stocks and mutual funds will become part of the investment universe. As such, over a period of time, it will be difficult to pin down familiarity and fluency of a company’s name; a company name that is familiar in one region may not be familiar in other regions.