Opinion: What is in a business name change? Often a higher share price.

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On October 4, the stock that was trading with the CREE ticker started trading as WOLF WOLF,
-9.23%,
reflecting the company name change from Cree to Wolfspeed.

Wolfspeed shares jumped 1.2% on a day when the Nasdaq Composite COMP Index,
-0.33%
fell 2.1% – an outperformance margin of 3.3 percentage points.

Is it a coincidence that the Wolfspeed stock outperformed the market on the day it started trading under the new ticker? Maybe not.

Over the years, many companies changed their names and many of them outperformed the market in the days that followed. Unfortunately, according to the consensus of academic studies I’ve read, changing a company’s name on average doesn’t improve its stock performance over the long term – and can actually hurt it.

In Wolfspeed’s case, the name change completes that company’s multi-year process of moving from a predominantly LED lighting company to a semiconductor company. The question is not whether it was a good idea for the company to bet its future on semiconductors instead of LED lighting. The question is whether, given that Wolfspeed has already turned to semiconductors, its stock will work better with the WOLF ticker than CREE. (An email to Wolfspeed’s media relations office requesting comment was not immediately responded to.)

If the stock market were completely rational, then a name and ticker change would have no effect on the stock price. This is because the changes are purely cosmetic, having no impact on the profitability of a business. If the change affects the performance of stocks, it must be evidence of investor sentiment rather than fundamentals. This is exactly what many studies have found.

Name game

One channel through which a name or ticker change can impact performance traces investor preference for cute or salient names and tickers. In an interview, Michael Cooper, professor of finance at the University of Utah, pointed out that “CREE”, in and of itself, makes no sense. “WOLF”, on the other hand, is instantly recognizable and additionally has many positive associations for the qualities that investors might like to see in their businesses. For example, characteristics that the dictionary lists for “wolf” include predatory, raptor, and fierce.

Cooper referred to a study published several years ago who found companies with “familiar and likable” names and teleprinters “trading at large premiums” compared to companies with unfamiliar or unsympathetic names.

Another channel through which name changes can impact performance is to tap into investor euphoria about a particular topic or technology. It is less clear that this channel is relevant to Wolfspeed’s name and ticker change, although it may still play a role, given investor enthusiasm for semiconductor technology.

A spectacular illustration of this effect has recently been the performance of companies that have changed their names to integrate the “blockchain”. A study found that companies that changed their names to include ‘blockchain’ outperformed the market by 30% in the three days surrounding the name change announcement.

An older illustration came in the Roaring Twenties of the late 1990s, during the start-up phase of the dot-com bubble. A to study co-authored by Cooper, found that companies that changed their name to include “dot com” outperformed the market by 74% in the 10 days surrounding the name change announcement.

The reverse of the “dot-com effect” occurred during the dot-com bubble deflation – when any association with the internet was a handicap. Enough on, the researchers found evidence of a “dot-com suppression” effect. During that time, companies removing all references to the Internet or “dot com” from their names outperformed the market, on average, by 64% in the 60 days surrounding the announcement of the change.

Long term impact

Few academic studies have assessed the long-term impact of corporate name changes. But the evidence gathered by these studies suggests that they are either neutral or negative.

A study, which focused on all UK listed companies that changed their name at some point between 1987 and 2002, found that on average 36 months after the name change was announced, these stocks were lagging behind the overall market.

Another study looked at name changes among companies listed in Hong Kong between 1999 and 2008. He did not find “long term [36-month] love relationship [of name changes] with the share price… the performance.

The essential ? Shares of the company now known as Wolfspeed could indeed outperform the market. Yet it will not be because of its new name or symbol, but because its business is growing faster and more profitable than the rest of the market.

Mark Hulbert is a regular contributor to MarketWatch. Its Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at [email protected]

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