The valuation effect of corporate name changes: a 30-year perspective.

• Author: Nguyen, Nhut H.

1. INTRODUCTION

   Since 1980s, thousands of firms have changed their names. Some of those name changes are associated with mergers, acquisitions, or other corporate restructuring events. However, many times name changes occur in the absence of any other corporate reorganizing activities. For example, initially criticized as one of the worst corporate name changes in history, Andersen Consulting, an extremely strong brand, became "Accenture" in 2001. The $100 million name change proved fortunate soon after, when the word "Andersen" became synonymous with "accounting scandal". This name changes was a result of internal competition and Accenture felt that the name should represent its will to be a global consulting leader and high performer (Accenture Company Overview). Such name changes are the focus of this study.

   There are costs and benefits associated with a corporate name change. Major indirect and direct costs come from a loss of goodwill or public recognition, confusion to customers, advertising costs, legal fees, new stationery, business cards, packaging and redesigning new logos. Those costs can be substantial and measured by millions of dollars, e.g. KPMG Consulting changed its name to Bearing Point in 2002, at an estimated cost of $45 million; International Harvester spent $13-$16 million to change its name to Navistar, and United Airlines spent over $7 million to change its 43 year old name to Allegis Corp in 1987 (Koku, 1997). However, there are some benefits associated with name changes. For example, a benefit would be the signalling effect of the company's growth potential and future expansion plans. Another benefit would be the improvement of the company's current market position and identification (Kilic and Dursun, 2006).

   The existing literature on corporate name changes does not find consistent evidence of significant positive valuation effect. Most studies (e.g. Howe, 1982; Horsky and Swyngedouw, 1987) found a transitory and weak valuation effect of name changes. The only striking positive impact is evidenced in cosmetic name changes, which, as argued by Cooper et al. (2001, 2005), is driven by investor mania, rather than rational pricing.

   This paper extends existing literature and investigates the valuation effect of name changes over a longer period. Specifically, we examine the average valuation effect of name changes for 4,287 observations from 1978 to 2008. The results show that companies that change their names earn significant abnormal returns of 1.41% for the three days around the announcement date and 3.58% for the 101-day event period of day t-60 through day t+40 surrounding the announcement date. Although a post announcement reversal is observed, it cancels out only 34.4% of the positive pre-announcement return of the 101-day event window. Furthermore, the results show that the valuation effect of name changes is stronger for major name changes, smaller firms, and firms in the manufacturing and service sectors. In addition, economic condition and book-to-market ratio do not have a significant impact on stock returns of the name change firms. The remainder of this paper is organised as follows. Section 2 reviews the existing literature. Section 3 describes our sample and methodology. Section 4 presents the results. Section 5 concludes.

2. LITERATURE REVIEW

   Research on corporate name changes uses both rationality and irrationality arguments to explain stock price movements around the name change date. The rationality perspective believes that a corporate name change conveys information about the company's future performance and cash flows (Horsky and Swyngedouw, 1987; Kilic and Dursun, 2006). Therefore, market participants should respond to the information and adjust the share price accordingly. Another scenario under the rationality perspective is that firm name is a utility producing attribute that can shift preferences, cost functions and demand curves (Horsky and Swyngedouw, 1987). By changing its name, a firm could improve its performance through such means as higher employee morale or increased consumer preference for the firm's products (Horsky and Swyngedouw, 1987).

   The pioneer in the corporate name change literature, Howe (1982), examined the valuation effect of corporate name changes during 1962 to 1980. He found no statistically significant abnormal returns associated with corporate name changes and argued that it was because the information was already incorporated in the share prices. Using a sample of 58 name change firms during the period from 1981 to 1985, Horsky and Swyngedouw (1987) examined the effect of name changes on corporate profit performance and the types of firm that had most positive market reactions. They found that although the act of name change per se did not increase the demand of the firm's product, it sometimes served as a signal that other changes in management and organization would be undertaken. Bosch and Hirschey (1989) found a statistically weak pre-announcement effect except for firms that had previously undergone major corporate restructuring. They found that a negative post-announcement drift cancelled out 86% of the positive pre-announcement returns for their sample of 79 name change firms over the period of 1979 to 1986. Bosch and Hirschey (1989) also studied different types of name change and found no significant cumulative abnormal returns (CARs) for major and minor name changes. However, they failed to examine whether the difference in CARs between major and minor name changes is significant. Karpoff and Rankine (1994) found that the announcement of a corporate name change had a small average valuation effect, which suggests that market participants may have already anticipated the name change. They further argued that the positive 0.4% CAR over a 2-day window was sample specific and largely influenced by outliers. Kilic and Dursun (2006) studied 44 name changes for industrial goods companies and consumer goods companies. They found that market participants were more sensitive to name changes made by industrial goods companies while they were not responsive to the name changes made by consumer goods companies. More recently, Robinson and Wu (2008) examined 1,965 name changes during the period of 1980-2000 in the U.S. and found evidence that is contrary to previous studies.1 They documented striking permanent abnormal returns of 4.02% over six months and 5.97% over twelve months after the event day. Their results were mainly driven by firms that had subsequent related asset purchases and/or unrelated asset sales. Their results strongly support the rationality perspective that corporate name changes are a signal for future directions of firms.

   Outside the context of U.S. markets, Josev et al. (2004) investigated the name change effect in Australia during the period from 1995 to 1999. They documented a negative relation between major name changes which coincide with prior corporate restructurings and CARs over a 21-day event window. In the U.K. context, Andrikopoulos et al. (2007) found that name changes were negative signals, and the market reacted slowly to the information content of a name change announcement. More recently, Mase (2009) investigated both the short-term and long-term name change effects and found that firms changing their names performed poorly over 3 years after the event day. This long-run poor performance...