What Do "TIKR SMBLS" Say About IPO Performance?
Picture this…you’re an Equity Analyst, part of a syndicate for an IPO. You’ve been pushing 14 hour days for over a week, endlessly polishing your goliath valuation model. You’ve scribbled formulas on napkins from two day old Chinese take-out and randomly placed Post-It notes are taped around your desk. But it all paid off because not only are you in-line with the other models but the lead banker believes yours to be the most accurate! This is great personal victory but when it comes to buying and selling the issue out of the gate, do such financial valuations matter to investors? Read more to find out what does…
Take a look at these ticker symbols and their first day returns. Look closely at their naming, do you see any connection?
According to a University of Basel study reported by MarketWatch, they concluded that,
firms with a favorable name rating experience significantly higher initial returns upon going public…”
In psychology this is known as fluency, or the processing of stimuli to memory recall. Previous studies suggest that our brains are hardwired to remember rhyme, alliteration, and other mnemonic devices and that this fluency is reflecting in abnormal market returns of particular symbols. The intuition is that among competing stocks investors look for those that have a visual cognitive ease, pronunciation, and an operative association.
Conversely, in a 2004 Financial Management Association reported by FritiNancy finds that when firms change ticker symbols but not their names, both trading volume and stock price declined immediately and stayed down.
Do you think there is there any correlation here or have firm-level factors been largely excluded?
However, Raghavendra Rau, a professor of finance at the University of Cambridge says, the problem with these studies is what is the economic mechanism underlying this phenomenon? He thinks a group of investors who buy and sell IPO stocks will inflate trading volume, not prices and offers two explanations:
• Investors are more optimistic than those who don’t trade in fluency (unlikely)
• They treat trading volume as an indicator of stock value, with no effect on prices
However, a study by Alex Head, Gary Smith, and Julia Wilson of Pomona College demonstrated an 11.5% differential of annual compounded returns between an equally-weighted fluent portfolio and the NASDAQ & NYSE indices from 1984 – 2005 (see page 21).
In their analysis they also accounted for industry concentration, sector performance, quarterly earnings, and risk premiums which all failed to explain the phenomenon so seemingly, both of Rau’s explanations are incorrect.
Do you think psychology has sensible results to contribute to economic theory?
It’s my perspective that, there are a limited number of studies showing the relationship between ticker symbol fluency and performance and a strong correlation has yet to be drawn. Controlling for say, financial analyst bias may only shift the focus on a particular group of investors in which this phenomenon occurs.
However, the value here is that a well-tested psychological variable have can offer an innate human motive to a particular economic action contrary to Professor Rau’s effect ex ante causality explanation. In this case, despite rational expectations of investors and perhaps even in specific instances, the evidence suggests that investors forge irrational heuristics to make investment decisions.
Do you think a stock symbol has any bearing to its IPO performance?
I don't believe markets are that inefficient. I'd rather think the companies with better sounding tickers also have better sounding names, which makes marketing more effective/ helps win market share.
It would help to know the reasons why companies change their tickers and not names.Not at all. Just sounds like confounding variables that can suggest an interesting conclusion, but really based on nothing. Companies with funny sounding names or unique names that won't have a ticker already (like BNNY or GRPN) are usually more unique hit or miss type companies. Plus, the hotter the IPO, the more likely you are to get whatever ticker you want, though I have no clue how naming works on the exchanges to be honest. But I'm sure if someone else was thinking about ticker FB, Nasdaq would suggest they leave it alone for Facebook, for example, which everyone knows is a hot IPO. Something like LFC - a life insurance company in China - is really boring and the ticker is going to be boring too. They're not going to try and get ticker DIE or something, and if they did it wouldn't help performance would it? But if you look over the long term these companies probably outperform the ones with "cool" tickers, with exceptions of course (TAP, my personal favorite).
Interesting thought but I'd venture to guess the study is not accounting for some confounding variables in order to pump out an interesting story.
Names like LUV, GEEK, SRRY, or ZZ might matter...to the average 6 year old investor who only cares to look at book covers.
I’ll address each of you in order…
The only example FritiNancy offered was Philip Morris changing their name to Altria. I suspect this was done to re-brand them in light of the negativity of the national lawsuit brought against them by the states a number of years ago. However, they kept their ticker symbol and she claims that benefited their share price in avoiding price and volume declines. Personally, I would have liked to see the evidence for that claim too as it’s equally as suspect as the former.
Generally, I have to agree with you. It seems this work was done isolated from other variables. I wonder if they at least ran a regression model to account for other major factors and see what the coefficient was for this variable compared to others like firm-level and market factors? Even if there was a correlation, I’ve read a scientific paper discussing the regularity of “false positives” which may be the case too. However, like I said, I think the value of psychological variables are a precursor to economic ones but in this case the evidence doesn’t seem strong enough and according to my sources there isn’t a whole lot of studies done on this either.
You address another issue here too. These studies seemingly used students as their control group but it would have been better to use investors who are non-finance professionals. The result would have been more meaningful. They could have been English, psychology, humanities, or art majors who bear little if no impact on investing.
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