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Apr 04, 2011

IR Papers: The value of a name

A roundup of academic research from the world of IR studies

The Googles, Apples and Dells of the world have an advantage that’s rarely touted: their names trip easily off the tongue. Coincidence? Not necessarily.

The more fluent a corporate name, the greater the investor recognition, the wider the ownership and the higher the overall valuation, find professors at Emory University and the University of New South Wales. According to some measures, those companies with the most fluent names trade at a 10.4 percent premium to those with the least fluent names.

Especially for new enterprises, a non-fluent name ‘is a barrier to entry,’ says T Clifton Green, associate professor of finance at the Goizueta Business School at Emory. Some of the less euphonious names out there include Knape & Vogt Manufacturing, American Xtal Technology, and Hilb Rogal & Hobbs Co.

In measuring fluency, the professors considered the length of the corporate name (shorter equals easier to mentally process), whether all the words cleared a spell-check filter, and a word’s degree of Englishness. Green explains that letter combos like ‘the’ frequently occur in English and are therefore easy to pronounce, while ‘thl’ is something of a stumbling block.

For IROs mulling a name change, the evidence suggests it’s worthwhile taking the plunge as most name changes do increase fluency. If a name change isn’t on the cards, IROs should remember that nothing succeeds like success: even an initially confounding name like Xerox comes to sound natural once the company’s products achieve superstardom.

Mainstream equity analysts heart CSR
For years, IROs have eagerly preached to the socially responsible investment (SRI) choir about their environmental, ethical and community relations efforts. Evidence now suggests they should engage in the same types of conversations with mainstream equity analysts, too.

Christian Fieseler, an assistant professor at the University of St Gallen in Switzerland, finds that German equity analysts with no particular background in SRI are eager to incorporate responsibility issues into their mainstream investment analysis. Ideally, though, IROs should present CSR strategies in a way that’s consistent with a traditional financial perspective. Fieseler notes that equity analysts largely take ‘a functional view’, emphasizing economic rationales.

Widely followed stocks more prone to surprise crashes
At last, there may be a tangible upside to operating beneath the sell-side radar: fewer stock price crashes. A new study finds that analyst coverage facilitates the disclosure of bad news – so widely covered companies suffer more price drops when disappointing news comes to light.

‘There’s a more even distribution of bad earnings surprises coming out during the year when a company is followed heavily by stock analysts,’ explains George Pennacchi, finance professor at the University of Illinois, who co-wrote the study.

On the other hand, a lack of analyst coverage doesn’t insulate a company from roller-coaster rides. The researchers find that for companies with few or no analysts following them, the price drops still occur; they just tend to cluster around earnings announcements.