Study ties company names to stock performance Last Updated Mon, 29 May 2006 10:49:36 EDT CBC News Shareholders are more likely to purchase newly offered stocks that have easily pronounced names, a pair of Princeton University researchers say.
Adam Alter and Danny Oppenheimer found that a stock's performance immediately after an initial public offering appears to be linked to how easily investors can pronounce its name and stock ticker symbol.
"This research shows that people take mental shortcuts, even when it comes to their investments, when it would seem that they would want to be most rational," said Oppenheimer, an assistant professor of psychology.
Their study was published in the May 30 issue of the journal Proceedings of the National Academy of Sciences.
It said the effect also extended to ticker symbols. For example, with all else being equal, a stock with the symbol BAL should outgain a stock with the symbol BDL in the first days after an IPO, the researchers found.
"We looked at intervals of a day, a week, six months and a year after IPO," Alter, a graduate student said. "The effect was strongest shortly after IPO."
"For example, if you started with $1,000 and invested it in companies with the 10 most fluent names, you would earn $333 more than you would have had you invested in the 10 with the least fluent," he said.
Oppenheimer acknowledged that their findings do not tell the whole story about the post-IPO success of a stock, nor are they good indicators of long-run performance.
"Despite the implications of these findings, investors as a group tend to correct themselves in the presence of new information about how the markets operate," he said.
"You shouldn't make changes to your stock portfolio based on our findings. The primary contribution of this paper is to add a piece to the jigsaw of understanding how markets operate."
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