Is a Company Name Important to Investors?

How do you pronounce Xzeres Corp? What about Zvelo Inc or Quantrx Biomedical Corp? Does a less fluent name impact the number of people who want to own the stock and its value?

Two scholars examined company name fluency and related it to the stock’s ownership, trading, and value. They define name fluency by how easy it is to pronounce the company’s name. Easier to pronounce names are shorter and quick to recognize.

Investors are supposed to make investment decisions based on expected return, risk, correlation with other stocks, etc. Why should a name matter? One reason is that investors seem to believe that companies they are familiar with are better investments than non-familiar stocks. Thus, a more fluent name seems more familiar and is easier to recognize. Thus, if enough people exhibit this bias, then more investors will buy and own name fluent stocks. The greater demand will give these firms higher valuations.

For companies listed on US stock exchanges, the authors create fluency scores by determining the “Englishness” of the names. This is done with a linguistic algorithm. Also, the length of the name and whether the words appear in the dictionary are determined.

Next, they compare the name fluency for nearly 15,000 companies to the breadth of ownership, trading volume, liquidity, and valuation. Breadth of ownership is the number of shareholders. Trading volume is the number of shares traded scaled by the number of shares outstanding. Two types of the market-to-book ratio are used for the valuation measure.

They find that companies with more fluent names have more breadth of ownership, high trading volume, higher liquidity, and higher valuation.

In addition, these effects occur for:

• Companies that change their name to a more fluent one get more ownership, volume, and value.

• High fluency closed-end mutual funds have higher premiums (or smaller discounts).

• High fluency opened-end mutual funds have more investor flows into the funds.

A rose by any other name would smell as sweet…but not to investors. Investors like a rose, but not when it's called a Rosa, Rosoideae, Rosa moschata, or Rosa woodsii.

Source: T. Clifton Green, Russell Jame, “Company name fluency, investor recognition, and firm value,” Journal of Financial Economics, 2013, vol 109, pp. 813-834.