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Facebook shares may perform better if the company renames itself, as it’s currently considering.
I know that’s difficult to believe. How can something as cosmetic as a new name fool anyone into thinking that a stock is a better value? Yet name changes apparently can have that effect, according to academic research into companies facing negative publicity that change their names.
Most research into corporate name changes focuses on companies that are trying to jump on the bandwagon of some hot investment theme or fad. I devoted a column to that research several weeks ago, pointing out that, during the internet bubble in the late 1990s, companies’ stocks on average performed much better if they changed their names to add “dot com.” A more recent illustration of the same phenomenon came when some companies changed their names to include the word “blockchain.”
Facebook
FB,
is in just the opposite situation currently. Rather than wanting to take advantage of some new investment theme or fad, the company has an incentive to disassociate itself from the considerable negative publicity surrounding it.
Perhaps the most prominent study about companies in such a position was co-authored by Michael Cooper and several colleagues. Cooper is a finance professor at the University of Utah and chair of its finance department. The study focused on name changes that occurred after the internet bubble burst, when having “dot com” or “internet” in company names became a liability. In an interview, Cooper said that companies changing their names to remove any such references outperformed by the market, on average, by 64% over the 60 days surrounding the announcement of the change.
Cooper added that investors should not expect anything similar if Facebook does change its name. That’s because it is a huge and widely-followed company, in contrast to the much smaller companies that, in the wake of the internet bubble’s deflation, removed any reference to the internet or “dot com.”
Cooper nevertheless says we shouldn’t under estimate the number of investors “who are gullible and could get fooled” by a Facebook name change. “To the extent the company faces negative pressure because of negative publicity, I would guess that changing its name could very well lead to Facebook’s stock performing better than it would have otherwise.”
If you had any doubt about investor gullibility, just think back to how traders reacted this past January when Tesla’s Elon Musk tweeted “Use Signal,” in an apparent reference to the encrypted messaging service that was developed by a non-profit organization and is not publicly traded. That didn’t stop traders from piling into an otherwise-obscure stock named Signal Advance
SIGL,
sending this once penny stock soaring by more than 12,000% over just two trading days.
Or who can forget the trading frenzy in 2013 for Tweeter Home Entertainment, a company that at the time was in bankruptcy and trading with the ticker TWTRQ. That was close enough to the proposed ticker for Twitter
TWTR,
which had not yet gone public, to lead many gullible investors into a buying frenzy. TWTRQ’s price soared over 1,400% in two weeks’ time.
The bottom line? Investors often behave irrationally, changing their opinions about a stock because of cosmetic changes like a name or ticker change. But given investor irrationality, it’s certainly not irrational for Facebook to consider changing its name.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
More: What should Facebook’s new name be? Twitter users have some ideas
Also read: Facebook struggles to figure out how many users it actually has
