Does it Pay to Change Your Company's Name? A Stock Market Perspective

Abstract

A company's name is commonly considered to be an integral part of its image, just like the quality of its products or the quality of its technical services. Changing a company's name is a major policy decision contemplated by many firms and actually implemented by some each year. This paper attempts to examine, albeit indirectly, whether a name change can improve the profit performance of a firm and what type of firm is more likely to succeed in doing so. We use the “event study” methodology developed in finance to examine the above questions with respect to 58 corporations that changed their names in 1981–1985. Our findings are that, for most of the firms, name changes are associated with improved performance, and that the greatest improvement tends to occur in firms that produce industrial goods and whose performance prior to the change was relatively poor. Evidence that industrial good producers are also heavy users of corporate advertising lends further credence to this finding. Our findings do not support, however, the contention that the new name per se will enhance demand for the firm's products. Rather, it seems that the act of a name change serves as a signal that other measures to improve performance such as changes in product offerings and organizational changes will be seriously and successfully undertaken. The rationale behind why such a signal is sent and why it is believed is discussed.