How ticker symbols predict stock-market success
LONDON (MarketWatch) --
The Bard of Avon certainly wasn't thinking of corporate names and ticker symbols when he wrote, "That which we call a rose/By any other name would smell as sweet." He never attempted to link a company's appellation to its stock-market performance.
FB or not FB? That was Facebook's (FB) question. But surely there's no reason to pin the dismal performance of Mark Zuckerberg's social-networking empire in the three months since its initial public offering on a severe case of errant ticker christening. The stock may be down 50%, but you're not going to blame the FB ticker itself.
Though maybe you should.
What's in a name? Plenty, it seems. Stocks that have "nice" names, research shows, tend to outperform those with "ugly" names immediately after going public. It's a beauty contest -- except that what counts as drop-dead gorgeous is a stock symbol's "cognitive ease" or "processing fluency."
In other words: If you can't pronounce it, don't buy it.
Naming rights
The academic work in this area, which isn't terribly voluminous, tends to start off with some reasonably intelligible precepts -- chiefly, the notion that finding success when faced with complicated choices can be boiled down to a matter of mental friction. So when choosing among competing stocks, look for the ticker symbol that scans well. At least in the immediate term.
The inner-behaviorists among us will at this point be reaching for some recent IPO hooks to hang this theory on.
Still, what about the some of the outright tongue twisters and syllable-hogging designations?
On the other hand,
"If I sent you an email in a normal font, at a normal size, you would be able to process that a lot easier than if I sent that same email to you in an italic font, at a smaller size. We make very different judgments depending on the ease at which we can process information," said Adam Alter, a professor of marketing and psychology at New York University. Alter is the co-author of a widely cited study that examines the relationship between fluency and stock performance.
"While people pay a lot of attention to the numbers in front of them when making decisions about stocks, it's often what's going on in the background that is driving the decision," he added.
Alter and research partner Daniel M. Oppenheimer, a professor at the University of California, Los Angeles, write that, "Whereas financial analysts delve into the differential performance of industries and market sectors, a straightforward psychological principle cuts across these categories and predicts, quite simply and robustly, that companies with [easily pronounced] names like Barnings Incorporated will initially outperform [right after an IPO] companies with [difficult] names like Aegeadux Incorporated."
A separate Swiss study conducted at the University of Basel, building on Alter and Oppenheimer's work, concluded that "firms with a favorable name rating experience significantly higher initial returns upon going public, but also experience higher (abnormal) stock returns up to ten trading days after the initial offering."
Yet Raghavendra Rau, a professor of finance at the University of Cambridge, said that the problem with these kinds of studies is the lack of what he called a "clean economic mechanism" underlying the phenomenon.
"Trading depends on differences of opinion on the true value of the stock," Rau said. "However, suppose you have a significant group of investors who buy and sell only companies whose names they are fluent with. You can imagine that trading volume will increase (as these are the only stocks traded) but why will prices be affected?"
He added: "Unless either (1) the investors who both buy and sell are significantly more optimistic than investors who don't trade on name fluency (which seems unlikely) or (2) other investors treat trading volume as some kind of indicator on stock value, there will be no effect on prices. In either case, the burden of proof is on the researcher to show which mechanism is at work."
Still, studies show there is a fair amount of randomness in people's investment decisions. A couple of years ago, the New Yorker magazine ran a cartoon that shows a man in Manhattan running after a fedora that the wind has abruptly swept off his head. The image's caption reads: "Stocks tumble as market reacts to man losing his hat at Broadway and Forty-Second Street."
Facebook didn't reply to a question about its decision to go with the FB nom de plume. Unlike
"Eff Bee"?
Of course, Facebook's market reception might have been quite different had it chosen the ticker symbol "LIKE."
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