International Journal of the Economics of Business

ISSN: 1357-1516 (Print) 1466-1829 (Online) Journal homepage: http://www.tandfonline.com/loi/cijb20

Corporate Name Change and the Market Valuation

of Firms: Evidence from an Emerging Market

Arpita Agnihotri & Saurabh Bhattacharya

To cite this article: Arpita Agnihotri & Saurabh Bhattacharya (2016): Corporate Name Change
and the Market Valuation of Firms: Evidence from an Emerging Market, International Journal of
the Economics of Business, DOI: 10.1080/13571516.2016.1253186

To link to this article: http://dx.doi.org/10.1080/13571516.2016.1253186

Published online: 30 Nov 2016.

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Int. J. of the Economics of Business, 2016
http://dx.doi.org/10.1080/13571516.2016.1253186

Corporate Name Change and the Market Valuation of

Firms: Evidence from an Emerging Market

ARPITA AGNIHOTRI and SAURABH BHATTACHARYA

ABSTRACT Investors’ responses to a firm’s name change and the determinants of

their response are scantly explored areas in the field of behavioral finance. Based on a
sample of 415 Indian firms from 2005 to 2014, this study suggests that investors
respond positively to the announcement of firm name changes. Furthermore, the study
indicates that when firms do not indicate geographical specificity in the name and have
a specific rather than generic name, then the firm will experience greater abnormal
returns. Also, when firm names are fluent and are associated with the owner’s family
name, again, abnormal returns generated are positive. Nevertheless, as a firm ages and
investors gain more information about it, then abnormal returns due to name change
decrease.

Key Words: Firms’ Name Change Strategy; Emerging Markets; Family Firms;
Event Study.

JEL classifications: L10; G15; G32; G14.

1. Introduction
Does a firm’s name matter? Glynn and Abzug (2002) propose that a firm’s
name is the central part of an organization that binds together stakeholders’
relations. Academic scholars in the past (Glynn and Abzug 1998) have relied
on organizational identity theory to understand the significance of a firm’s
name. According to organizational identity theory, whenever any discrepancy
arises between a firm’s identity and image, senior managers take action to
resolve such discrepancies by changing the name (Gioia, Schultz, and Corley
2000). Nevertheless, a name change is an expensive proposition. It involves
legal fees, and advertising and promotional expenditure, and it frequently calls
for rebranding efforts and various other related expenditures. Depending upon
the size of the business, the cost of a name change could vary between
$100,000 and $1 million (Parmar 2014).

Arpita Agnihotri, Business Department, Northland College, 1400 Ellis Avenue, Ashland, 54806, WI, USA;
e-mail: aagnihotri@northland.edu. Saurabh Bhattacharya, Marketing Department, Newcastle University Business
School, 5 Barrack Road, Newcastle Upon Tyne, NE1 4SE, UK; e-mail: saurabh.bhattacharya@ncl.ac.uk.

! 2016 International Journal of the Economics of Business

2 A. Agnihotri and S. Bhattacharya

Despite being an expensive proposition, firms do change their names

(Kalaignanam and Cem Bahadir 2013). Hence, it is vital to investigate how
investors respond to firms’ decisions to change names. Do investors appreciate
the managerial action of eliminating the discrepancy between a firm’s identity
and business? For example, AV Cottex Ltd., an Indian company that was
engaged in the manufacturing of textiles, changed its name to Tavernier
Resources Limited when it switched its business from textiles to gems and
jewelry. Are investors likely to reward this behavior? Extant studies have
given scant attention to this issue, and furthermore, the handful of studies that
have been conducted previously are primarily from the perspective of
developed markets (Cole et al. 2015; Kalaignanam and Cem Bahadir 2013; Lee
2001) Since emerging markets are now gaining importance across the globe, it
is of interest to investigate investors’ responses to the name changes of firms
belonging to these markets (Yoon and Park 2015). Furthermore, emerging
markets suffer from institutional voids resulting from ill-developed capital
markets (Khanna and Palepu 2000). Thus, the response of investors in
emerging markets may differ from that of developed markets. Furthermore,
investors’ responses, in terms of abnormal returns attained from a name
change, could be contingent on several factors, such as strategic name change,
that is, pertaining to changes in business model, acquisitions, and so on
(Cooper, Dimitrov, and Raghavendra Rau 2001). However, these factors have
received limited attention in the existing literature on corporate name change.
Although abnormal returns signal the short-term market-based performance of
a firm, it is important to explore the contingencies under which investors
respond positively or negatively to name-change announcements, generating
abnormal returns. Thus, this study aims to: (1) identify whether name change
is associated with abnormal returns for firms in emerging markets, and (2)
explore the characteristics associated with a new name that result in abnormal
returns. We particularly explore the role of geographic specificity, fluency,
family association with a firm’s name, and listing age of the firm in influencing
investors’ responses to name change and thereby leading to abnormal returns.
In this study, using Kahneman’s (1973) cognitive heuristic theory, we
explain why an investor would respond to a firm’s name change and how the
above-mentioned contextual factors could influence investors’ responses. The
behavioral finance literature suggests that investors have bounded rationality
(Barberis and Thaler 2003; Simon 1972) and hence rely on heuristics and biases
to interpret signals hidden in the name of the firm (Kahneman 2003;
Kahneman and Tversky 1979), which then influences their response to a firm’s
name change.
This paper contributes to the extant behavioral finance literature in several
ways. First, it explains how investors respond to a firm’s name change. We
extend cognitive heuristics theory to the field of investor psychology to explain
how investors take mental shortcuts to reward or penalize firms when they
change their names. Furthermore, as the influence of a name change on
investor response is context dependent, investors in developed markets may
not respond in a similar manner as investors in emerging markets do. Extant
studies have focused mainly on developed markets. Through this study, we
present investors’ responses to firms’ name changes in the context of one of
the fast-growing emerging markets – India. We focus on this country for
several reasons. First, Indian firms are globalizing at a rapid pace. This is
 Corporate Name Change and the Market Valuation of Firms 3

evident from the fact that some of them, such as Infosys and Ranbaxy, are
even listed on international stock exchanges. Thus, it is likely that Indian firms
focus on their names in order to entice international stockholders to invest in
Indian firms. The second reason is the institutional context of Indian firms. The
presence of institutional voids marks the presence of business groups in India,
which are corporate parents holding several firms within them. In global
competition, investors might not appreciate investing in family businesses and
thus, on similar lines, in business groups. This means that, in emerging
markets, investors might not appreciate the presence of the business-group
name in the firms’ name, which is affiliated to a focal business group. In this
way, our study also contributes to signaling theory, where, by virtue of firms’
names, managers signal several traits associated with firms such as family
association. Second, our study adds to the literature on investors’ cognitive
heuristics, which has been mainly used to explain investors’ behavior in
making investment decisions (Otuteye and Siddiquee 2015). Through this
study, we provide evidence as to how investors use their cognitive heuristics
to reward or penalize firms when they change their names. We specifically
explain how investors use mental shortcuts to interpret characteristics
associated with a new firm name. Third, our study indicates how information
hidden in a company name can help to raise a firms’ perceived status by
signaling its attributes to various stakeholders.
This paper first discusses relevant theory and hypotheses, followed by a
methodology and data section. We then present and discuss the results. Lastly,
we conclude with managerial implications and future scope and limitations.

2. Theory and Hypotheses

In a language-based society, a name communicates a large amount of
information in one or two words (Pennings, Lee, and Van Witteloostuijn 1998).
For an organization, a name represents a tradable asset, which cannot be
measured on a balance sheet (Srivastava, Shervani, and Fahey 1998). It
provides an identity and legitimacy to organizations, through which internal
and external stakeholders judge the firm (Glynn and Abzug 1998). Today, a
corporate name has a branding effect, and is used by firms to provide more
connectivity with customers. For example, a chain of hotels, when establishing
new branches, consistently uses the same name instead of naming each unit
separately. This is because the same name signals consistent commitment and
service that a guest could expect from any of its branches. Similarly, in
emerging markets such as India, business houses prefer to name their different
streams of business consistently, such as the Tata or Birla groups. Business
houses or groups refer to conglomerates, where a corporate parent is
diversified into different segments of businesses (Khanna and Palepu 2000).
Furthermore, the history of an organization, its reputation, and other resources
are also implied by the name of the firm, and it additionally provides
branding advantages to the firm’s product line (Berens, Van Riel, and Van
Bruggen 2005). Despite these significant advantages, firms sometimes do
change their names. What influences them to take this risky decision?
4 A. Agnihotri and S. Bhattacharya

According to cognitive heuristics theory (Kahneman 1973), investors have

bounded rationality (Simon 1972), that is, they cannot process all information
available to them. Hence, they rely on heuristics and mental shortcuts to make
judgments under the condition of uncertainty (Kahneman 2003; Tversky and
Kahneman 1973). For example, investors form an opinion about firms on the
basis of performance in the industry to which the firm belongs, rather than
analyzing firm-specific performance (Peng and Xiong 2006). This is a mental
shortcut for investors, since retrieving information about each firm is tedious
but for a particular industry is easy. For example, when firms added “.com” to
their name during the Internet boom period, even when they were not using
the Internet as their mode of business, investors rewarded such firms, as was
evident from the increase in their market valuation (Cooper, Dimitrov, and
Raghavendra Rau 2001). This happened because investors used heuristics to
conclude that “.com” in a firm’s name implied an Internet-related business
model. When the dot-com bubble bust in 2000, the same investors penalized
firms that did not remove “.com” from their name, despite their actual
business model (Berkman, Nguyen, and Zou 2011; Cooper et al. 2005). Also, in
the oil and petroleum industry, when the industry was at its peak, investors
rewarded firms with the terms “oil” or “petroleum” in their name compared
with firms in the same industry without these words in their name (Lin, Yang,
and Chang 2016). Again, this happened because investors, using cognitive
heuristics, responded to the presence of “oil” in a company name positively,
assuming that the firm operated in the oil sector. In other words, investors
tend to process available information superficially, rather than probing more
deeply.
The superficial processing of name changes can have positive or negative
effects on a firm’s market performance depending on investors’ responses. If
investors process the name change positively, with the hope of better future
performance, they may reward the firm (Bosch and Hirschey 1989; Karbhari,
Sori, and Mohamad 2004; Kot 2011). However, if they find the change
expensive and unnecessary, they may penalize the firm (Goettner and Limbach
2011; Kot 2011). Existing literature indicates that investors respond positively
to a name change if it is associated with some strategic changes, such as a
restructuring or merger and acquisition, which has been referred to as radical
or transformational name change (Goettner and Limbach 2011; Kot 2011; Mase
2009).
However, the literature on corporate name change has overemphasized
gains or losses associated with a firm’s name change, rather than the context
upon which these gains or losses can be contingent. In this study, we focus on
five factors to explore whether investors value name change: geographic scope
of the name, generic elements in the firm name, fluency of the firm name,
family connection with the firm name, and duration of listing on the stock
exchange. We use cognitive heuristics theory to explain how these factors can
influence investors’ responses to a firm’s name change.

2.1. Hypotheses
2.1.1. Name Change and Abnormal Returns. The upper echelon of a firm may
decide to change its name to signal the firm’s transformation, to signal future
 Corporate Name Change and the Market Valuation of Firms 5

strategies better, to improve customer preferences for its products, or to

eliminate a bad reputation associated with its previous name (Wu 2010).
However, empirical evidence of investors’ responses to name change has been
mixed. Whereas Josev, Chan, and Faff (2004) reported negative abnormal
returns due to name change, Cooper et al. (2005) reported positive returns. In
the closely related area of trade symbol or ticker symbol change, Kadapakkam
and Misra (2007) reported a significant decline in trading volume because of
name change. Also, in the long term, a firm’s name change generated negative
returns unless it was associated with a transformational or radical change
(Andrikopoulos, Daynes, and Pagas 2007; Wu 2010). However, the intensity of
positive returns varied with the leakage of name-change information prior to
the official announcement (Bosch and Hirschey 1989). Overall, evidence
regarding firms’ name change and abnormal returns has remained mixed, with
some studies claiming positive returns with others proving negative returns. In
an emerging-markets context, where resource scarcity arises due to
institutional voids, investors might consider this as an unnecessary expensive
venture. However, given that a firm’s name is also monumental in
determining its growth (Fombrun and Shanley 1990), it could generate positive
returns as well. Thus, based on extant studies and the above arguments in the
context of emerging markets, we hypothesize:

H1: A firm’s name change is significantly associated with abnormal

returns generated by virtue of the name-change announcement.

2.1.2. Geographic Specificity of the Firm. The role of geography in investment-

related decisions is well established in the existing literature (Agrawal,
Catalini, and Goldfarb 2015). When investors make global investment
decisions, country-level factors such as growth rate influence their stock
preferences, especially if they rely on heuristics. For example, when the
Chinese economy was growing, at one point, investors preferred Chinese
rather than non-Chinese stocks. Thus, firms with names containing words such
as “China” or “Chinese” received heightened investor attention (Bae and
Wang 2012). Investors may have used mental shortcuts, interpreting a firm
with “China” in its name as having a high growth potential because they
associated it with one of the fastest-growing economies, China. Similarly,
during the Korean War, investors showed patriotism by rewarding firms with
“USA” in their names (Benos and Jochec 2013).
Investors may also prefer to invest in home-country firms, as familiarity
reduces knowledge, language, and cultural barriers (Malloy 2005). However,
with the increase in globalization, investors’ preferences for firms that follow a
region-specific business model within a country has diminished, at least for
firms where region specificity is reflected in the name (Ke, Ng, and Wang
2010). For example, consider the firm Assam Company India Ltd, named after
a state in India. Investors’ mental shortcuts might lead to the assumption that
the firm follows a state-specific business model and does not engage with
customers and other stakeholders outside Assam, even if this is not the case.
Unlike in the case of China, which is considered to be fast-growing economy,
particular states such as Assam may not have any worldwide growth
6 A. Agnihotri and S. Bhattacharya

implications. Investors outside Assam would find an immediate disconnect

with such firms. Overall, evidence regarding investors’ positive or negative
response to geographic specificity of a firm’s name remains mixed. Thus,
investors might reward or penalize the firm, at least in the short term, by
generating abnormal returns. Hence, we hypothesize:

H2: When firms change their names, they are likely to be rewarded or
penalized more by investors if the new name is free from region
specificity.

2.1.3. Changing Generic Names. Organizational names are a reflection of

identity, which is unique for each firm. Similar to the way in which a brand
differentiates a firm’s products from its competitors, a unique name offers
distinctiveness to a firm (Alserhan and Alserhan 2012; Lee 2001) and increases
memorability, since it is unlikely to be confused with another firm name
(Gorman et al. 2013). When firms are associated with generic names, Internet
search-engine results may produce a number of similar names, which may
create confusion for investors, especially when they rely on mental shortcuts to
process information. For example, a firm with the name Camex is not likely to
entice investors, as many other firms with similar names, such as Camex
Wellness, Camex Tradelink, Camex Thermax, Camex Enterprises, and Camex
Ltd., also exist.
Studies in marketing indicate that consumers infer the quality of an
unknown brand based on its name: the catchier the name, the better the
perceived quality of the product. (Brucks, Zeithaml, and Naylor 2000).
Similarly, investors also use mental heuristics to gauge the profit-earning
potential of a firm by virtue of the distinctiveness of its name (Barber and
Odean 2008). When a firm name is changed to reflect uniqueness, investors
may reward the firm, and so we hypothesize:

H3: Investors are likely to reward firms with a new name when the
new name is unique.

2.1.4. Change in Name Fluency. Fluency represents the subjective experience of

ease with which people process information (Alter and Oppenheimer 2006).
Fluent names are easy to process mentally, which simplifies the task of
processing the meaning of a name (Tversly and Kahneman 1973). Linguistic
fluency makes the name familiar and likeable more quickly (Oppenheimer
2006). In examining evidence of consumer behavior with regard to the product
line of a firm, it has been found that products with an easy pronunciation
exhibit more recognition with consumers. For example, when consumers were
asked to rank fictional food additives and amusement park rides in terms of
their riskiness, they ranked less fluent names as riskier (Song and Schwarz
2009). In addition, consumers’ confidence about their choice also depended on
the fluency of the name (Tsai and McGill 2011).
Similarly, fluent names can influence investors’ perceptions about firms
(Cooper, Dimitrov, and Raghavendra Rau 2001). Again, investors can
 Corporate Name Change and the Market Valuation of Firms 7

experience cognitive overload when they face a multitude of investment

options, and they often rely on mental shortcuts to process complicated
information about various investment options. Thus, investors are more likely
to show favoritism for stocks that can be pronounced easily (Cooper, Dimitrov,
and Raghavendra Rau 2001; Green and Russell 2013) or have smooth-sounding
ticker symbols (Head, Smith, and Wilson 2009). For example, when investors
were asked to predict future returns for fictional companies, firms with more
fluent names were predicted to have higher returns in the future (Alter and
Oppenheimer 2006). Even long-term market-based performance favored firms
with fluent names (Green and Russell 2013). Stock-market brokers tend to
recommend those stocks with names that are simpler to understand and
pronounce (Shah and Oppenheimer 2007). Fluent firm names also experience
better liquidity and market valuation (Green and Russell 2013). We therefore
hypothesize:

H4: Investors are likely to reward firms for name change when the
new name is fluent.

2.1.5. Family Association Firm Names. Family-based firms, where promoters or

owners of the business have a majority shareholding, experience positive
performance when they differentiate themselves from stand-alone or non-
family firms based on a brand identity established by virtue of the family
name (Craig, Dibrell, and Davis 2008). Thus, family-based firm names provide
resource-based advantages. This is especially true in emerging markets
characterized by institutional voids, where business-group affiliation provides
several resource-based advantages to firms, such as access to financial and
managerial capital (Manikandan and Ramachandran 2015).
However, family-managed businesses or business group-affiliated firms
suffer from agency risks arising from differences between controlling and non-
controlling shareholders. This gives rise to corporate governance problems,
such as non-transparency in corporate disclosure practices (Ali, Chen, and
Radhakrishnan 2007). Furthermore, family and business-group firms are
perceived to be less professional, which is not a positive signal to investors
(Stewart and Hitt 2012). Due to these negative aspects associated with such
firms, investors might find an immediate disconnect with firms featuring a
family name.
Attractive names are more attention-getting, which is a rare cognitive
resource for busy investors (Kahneman 1973). Firm names based on family
members or business houses may not be considered attractive because of the
challenges associated with family firms. By changing a family-based firm’s
name to some other meaningful name, promoters can qualitatively signal to
investors the changing culture of the organization (Tetlock, Saar-Tsechansky,
and Macskassy 2008).
Family businesses in emerging markets such as India are generally present
in the form of business groups, where a corporate parent has holding into
several related and unrelated businesses. Though business groups in emerging
markets such as India were once considered to be symbols of trust and quality,
post liberalization and globalization, as resource availability improved,
8 A. Agnihotri and S. Bhattacharya

business group–affiliated firms have lost their advantages over stand-alone

firms (Carney et al. 2011). Thus, the reflection of a business-group affiliation in
a firm name could signal a negative image to investors. We therefore
hypothesize:

H5: Investors are likely to reward firms for name change when a
family name has been eliminated from the new name.

2.1.6. Duration of Listing on the Stock Exchange. For entrepreneurial firms,

securing resources is challenging. After the launch of an initial public offering,
investors draw inferences about the firm’s quality based on its social context,
for example the quality of its top management or board of directors. A firm’s
name also provides one such social context, especially at the superficial level
(Dietrich and Graumann 1989). As noted, factors such as name fluency or
family association offer mental shortcuts to investors, who cognitively process
information based on these parameters.
However, as a firm gains legitimacy, its past performance and earnings
quality – performance and reputation-related factors – may drive investors’
behavior, rather than the name (Certo 2003). Therefore, the name of a firm
loses its significance the longer a firm has remained on the stock market,
especially when other relevant information is readily available about the firm.
We hypothesize:

H6: Investors are likely to reward firms less for name change the
longer a firm has been listed on the stock exchange.

3. Data and Methods

We collected data on Indian firms from three different sources:
moneycontrol.com, Prowess (a financial database of Indian firms), and
business newspapers and magazines. We selected India as our country of
study, since it not only represents an emerging market, but also because the
presence of business groups in India and its growing global significance make
it an interesting platform for this study. Moneycontrol.com provided
information on firms that have reported a name change. We took a sample
from all firms that reported a name change from 2005 to 2014, with a resulting
sample size of 825 firms. Prowess provided information on financial-control
variables such as firm size and market valuation. However, for some firms,
information on these control variables was missing. So we removed these firms
from the sample. Additionally, some firms were associated with confounding
effects during the time frame; for example, along with the announcement of a
name change, a firm experienced another event, such as a change in top
management, an acquisition, alliances, or a dividend announcement. We also
removed these firms from our sample, ultimately leaving us with a sample of
415 firms. Information about the reasons for these firms’ name changes was
obtained from business newspapers and magazines published in India.
 Corporate Name Change and the Market Valuation of Firms 9

3.1. Calculating Abnormal Returns: The Dependent Variable

We used the market model to calculate abnormal returns. Following Bosch and
Hirschey (1989), abnormal returns for day t were calculated as:

ARit ¼ Rit " ai " bi Rmt

where ARit is the return of the stock i for day t and Rmt is the index return on
that day. Coefficients α and β are the ordinary least squares estimates of
intercept and slope, calculated using market model regression for the ith stock.
For this, a 245-day estimation period from t-250 to t-10 was used. Based on the
extant literature, the event period was defined as –10, +10 days (Cooper,
Dimitrov, and Raghavendra Rau 2001). We further divided this event window
into subsets in order to obtain cumulative abnormal returns for various
windows and further test it for significance. Thus, we first calculated average
abnormal returns and then the cumulative abnormal returns as follows:

X
N
ARt ¼ 1=N ARit ;
i¼1

where N is number of events.

Next, we calculated cumulative abnormal returns for various event
windows:

X
l
CARi ðk; lÞ ¼ ARit
t¼k

and finally, the cumulative average abnormal returns as:

X
l
CAARkl ¼ ARt ;
t¼k

where k and l represents event windows.

We calculated abnormal returns over four event windows, as shown in
Table 1. Next, we ran multiple linear regressions to examine determinants of
abnormal returns. Consistent with prior research, we chose an event window
of (0, +1) as our dependent variable.

Table 1. Abnormal returns for name change over for event windows
Event Window CAR T-Stat

−3, +3 4.69*** 3.64

−2, +2 3.35*** 3.08
–1, 0 1.56** 2.86
0, +1 1.4** 2.13

***p < 0.010; **p < 0.050.

10 A. Agnihotri and S. Bhattacharya

3.2. Operationalization of Independent Variables

3.2.1. Geographic Name Changes. If an old name consisted of a geographic name
that was removed from the new name, it was coded as 1, otherwise it was
coded as 0. For example, the name Ahmedabad Gases Ltd contained an Indian
city name, Ahmedabad. This name was changed to Excel Castronics Ltd. Thus,
this was coded as 1.

3.2.2. Change of Generic Names. This was calculated on the basis of degree of
uniqueness of the name. For example, an Internet search related to a firm
named “Color Chips” revealed the presence of other firms such as Color Chips
New Media Ltd, Color Chips Epoxy, Color Chips Garage Floor Paint, and
Color Chips Pantone, along with Color Chips Ltd. We thus considered all
firms that had both of the words, that is, “color” and “chips” in their names.
We did not consider the firms that had either of the two words in their name,
that is, either “color” or “chips.” Thus, if both words were present in the
name, it was considered for calculation of uniqueness score. Based on this
parameter, the uniqueness score of color chips was 1/5 = 0.2. A lower
uniqueness score implied a more generic name, while a higher score implied a
more specific name. Here, when we identified firms with similar names, we
also checked their year of formation. If a firm with a similar name was
founded after the name change of the focal firm took place, then it was not
included in calculating the generic name score.
Similarly, the degree of uniqueness of the name was calculated for the
previous name as well. The change in generic name was calculated as the
difference in uniqueness of the new name compared with the old name.

3.2.3. Measure of Change in Company Name Fluency. Fluency was measured in

two steps, following the approach of Green and Russell (2013), by taking the
sum of a word-length score and a dictionary score. For the word-length score,
we first measured the length of the company name. This measurement excluded
all expressions that were part of a legal name, such as Ltd., Corp, Corporation,
and so on. It also excluded words such as “a,” “and,” “&,” and so on. For
example, a name such as “Zenith Steel and Tubes Ltd” was read as “Zenith
Steel Tubes.” After these adjustments, the number of words in a company name
was counted to measure its length. A maximum score of 3 was fixed, following
the approach of Green and Russell (2013). Companies with a name containing
only one word received a score of 3. For instance, companies such as Trident,
Acrysil, or Baltiboi received scores of 3. When a firm’s new name consisted of
two words, it received a score of 2. Thus, names such as Blazon Marbles or
Ennore Coke were assigned scores of 2. Finally, when firm names consisted of
more than two words, they were scored as 1. Names such as Esha Media
Research or Visagar Financial Services were assigned scores of 1.
Next, the dictionary score of the name was calculated. If all the words in
the (adjusted name) of the firm passed the Microsoft spell-check filter, then it
was coded as 1, otherwise it was coded as 0. Thus, a name such as United
Breweries was scored as a 1, since both terms – “united” and “breweries” –
passed the Microsoft spell-check test. However, a name such as Swastik
Roofing was scored as a 0, since although “roofing” passed the Microsoft
 Corporate Name Change and the Market Valuation of Firms 11

spell-check test, “Swastik” did not. Finally, an overall fluency score was
calculated by adding the word length score to the dictionary score. A higher
total score suggests a more fluent name.
A similar process was repeated for the firms’ old name. The change in
fluency was then calculated as difference in fluency between the new name
and the old name.

3.2.4. Family Name Changes. If an old name consisted of a family name and it
was removed from the new name, it was coded as 1, otherwise it was coded
as 0. For example, Bajaj Plastics Ltd changed its name to Wopolin Plastics, and
was coded as 1. This is because Bajaj represents an Indian family name. So,
when the family symbol was removed from the name, it was coded as 1.

3.2.5. Age of Firms Since Their Listing on the Stock Exchange. The age of each
company was calculated not from the year of its incorporation, but rather from
its year of listing on the stock exchange. Information on the listing year of each
company was obtained from The Economic Times newspaper, from the online
segment of its “Market” section. For example, if Tavernier Resources Ltd was
listed in 1995, then in 2009, its age was reported as 14 years.

3.3. Control Variables

3.3.1. Cosmetic versus Non-Cosmetic/Strategic Name Change. Since the role of
strategic versus cosmetic change has been established in past literature, we
also control for the nature of the change (Cooper et al. 2005). Strategic changes
were dummy coded as 1, and cosmetic changes as 0. Thus, when name
changes were accompanied by some strategic reasons such as a change of
business model, restructuring, mergers or acquisitions, or diversification or
expansion, then it was treated as non-cosmetic/strategic change, and when no
such reasons were associated with the name change, it was treated as a
cosmetic change.
Following previous literature, the size and past market value of the firm
were also controlled (DeFanti and Busch 2011). We considered log of total
number of employees as a measure of firm size and market valuation of the
firm, using Tobin’s Q (Lenox and King 2004) as control variables. Tobin’s Q
was calculated as the ratio of market value of assets/book value of total assets.
This information was obtained from Prowess.

4. Results
The statistical significance of average abnormal returns for name changes is
presented in Table 1. The descriptive statistics are given in Table 2. The
multivariate regression analysis is presented in Table 3. In this study, two
models were tested. Model 1 explained the relationship between the
dependent and control variables. Model 2 depicted the relationship between
the dependent and independent variables.
Table 1 suggests that for various event windows, abnormal returns due to
name change are statistically significant. Thus, there is evidence in support of
12 A. Agnihotri and S. Bhattacharya

Table 2. Descriptive statistics

Mean S.D 1 2 3 4 5 6 7 8

1 CAR 0.35 0.29 1

2 Geographic name 0.12 0.37 0.11** 1
3 Family name 0.18 0.49 −0.12** 0.07 1
4 Generic name 0.21 0.68 0.17** 0.09* −0.09* 1
5 Name fluency 2.0 1.78 0.15*** 0.05 0.02 0.08** 1
6 Firm age 5.6 1.09 0.18*** 0.04 0.07 0.004 0.04 1
7 Log of number of 7.8 2.06 0.006 0.002 0.01 0.005 0.01 0.15** 1
employees
8 Tobins Q 1.63 2.79 0.10** −0.07 0.02 0.001 0.06 0.08 0.005 1

***p < 0.010; **p < 0.050; *p < 0.10.

Table 3. Multiple linear regression

Model 1 Model 2

Intercept 1.87*** (0.63) 2.01*** (1.02)

Geographic name 0.106*** (0.051)
Generic name 0.033*** (0.012)
Name fluency 0.078*** (0.02)
Family name −0.012*** (0.006)
Firm age −0.12*** (0.05)
Tobin’s Q 0.27** (0.13) 0.26** (0.13)
Strategic vs. cosmetic change 0.10** (0.03) 0.10** (0.03)
Log of number of employees 0.08 (0.06) 0.08 (0.05)
R2 0.20 0.27

***p < 0.010; **p < 0.050. Standard error is shown in parentheses.

our first hypothesis, which stated that name change is significantly associated
with abnormal returns. Our findings are consistent with extant studies such as
Lee (2001) in which positive abnormal returns are associated with name
change.
Our second hypothesis stated that removing geographic specificity in
names would influence abnormal returns. Since the beta coefficient is positive
and significant (β = 0.106, p < 0.05), we find evidence in support of H2,
implying that investors did interpret geographical terms in names negatively.
For them, geographical associations in a firm’s name most likely signaled that
the firm’s operations were restricted, triggering their cognitive biases.
According to our third hypothesis, specific or unique names would
generate positive abnormal returns. Since the beta coefficient is positive and
significant, there is evidence to support H3 as well (β = 0.033, p < 0.001). Thus,
investors reward firms for their unique names, as they find unique names to
be a simple differentiating factor for the firm. As a result, the firm’s revenue
earning potential is enhanced. According to a study of the insurance industry,
changes in insurance firm names to unique names did result in enhanced
revenues (Carson, Cole, and Fier 2016).
According to the fourth hypothesis, fluent names generate more abnormal
returns. Since the beta coefficient is positive and significant (β = 0.078,
p < 0.001), there is evidence in support of H4.
 Corporate Name Change and the Market Valuation of Firms 13

The fifth hypothesis stated investors are likely to reward firms for name
change when a family name has been eliminated from the new name. Since
the beta coefficient is significant but negative (β = –0.012, p < 0.05), there is
only partial evidence in support of H5. This is because we expected a positive
return for family name change. Our results indicate that when managers
remove family affiliation from the firm’s name, investors respond negatively.
In other words, when a family name or business house name is embedded
within a firm’s name, investors value the firm more. This may be a context-
specific situation. Due to the presence of institutional voids in emerging
markets, perhaps investors are more drawn to firms that belong to business
groups. In other words, even today in emerging markets, business houses
remain a symbol of trust for investors compared with stand-alone firms. The
presence of a business house name within a firm’s name may appeal to a
heuristic bias in the minds of consumers that, by virtue of the capital resources
and brand name associated with a business house, affiliated firms will do well
financially.
According to the sixth hypothesis, the stock exchange listing age of a firm
is negatively associated with abnormal returns due to name change. Here,
since the beta coefficient is negative and significant (β = –0.12, p < 0.001), there
is evidence in support of H6. This implies that if a firm has been listed on a
stock exchange for a long period of time, there is readily available information
on the firm’s past performance, awards received, and so on, and investors are
less influenced by a name change. Essentially, the significance of mental
shortcuts decreases for investors, as they are likely to rely on their long-term
memory to predict the future performance of a firm based on past
performance. Furthermore, investors might feel a name change is expensive
and unimportant for firms that have been long established on exchanges.
Furthermore, with regard to sensitivity tests, we reran the regression, taking
(–1, 0) as the event window instead of (0, +1). Although the beta coefficients
changed in their values, they remained statistically significant.

5. Discussion and Implications

In the past few years, the understanding of the significance of corporate names
has undergone tremendous change. Firms now signal their corporate values
and uniqueness to the entire community of stakeholders through their name,
rather than treating it merely as trade name (Benos and Jochec 2013). This
study examines the impact of name change on firms’ short-term stock-market
performance. It further explores contingent factors that influence investors’
responses to firm name changes. In doing so, this study begins with the
premise that investors use cognitive heuristics to gauge information about a
firm and thus rely on a firm’s name to interpret its identity. Using a cognitive
heuristics perspective, we hypothesized that abnormal returns associated with
a name change depend on several contextual factors, including fluency of the
name or geographical specificity of the name. Thus, this study contributes to
the cognitive heuristics literature about investors by providing a lens to assess
several factors associated with a firm’s name, which influences the way
investors perceive a firm’s image and profit-earning potential. Results indicate
significant abnormal returns associated with a firm’s name change, most likely
14 A. Agnihotri and S. Bhattacharya

because a name change conveys information about a firm’s social identity. In

other words, organizational name changes do secure legitimacy from investors
(Kalaignanam and Cem Bahadir 2013).
The current study provides findings consistent with the theory of cognitive
heuristics, which suggests that people in general use heuristics to analyze
information and then make decisions (Kahneman 2003; Kahneman and
Tversky 1979). Even investors can be expected to use heuristics, as our study
reflects. Because investors do use these mental shortcuts, name changes are
better rewarded when they take advantage of cognitive biases (e.g., when the
name is more fluent or has family name associations). This significant impact
on the market performance of firms indicates that managers need to create
appropriate identity around a firm’s name.
Our findings also indicate that investors do follow heuristics theory while
processing information, and hence managers should try to signal the identity
of the firm with its name, especially if a firm has been recently listed on the
stock exchange. In this way, our findings are consistent with signaling theory
as well. A firm’s name sends signals to investors about various traits of the
firm, such as whether its geographic spread is limited or whether it has a
family association. These results contradict other studies, which have proposed
that corporate name change has insignificant wealth and signaling effects (Kot
2011). Nonetheless, our results suggest that a firm’s reputation, which is a
source of competitive advantage, is not only influenced by economic
performance, but also by its organizational identity as implied by its name.
Furthermore, our study extends the corporate name literature, which to
date has mainly focused on shareholders’ responses to name changes but not
their determinants (Karbhari, Sori, and Mohamad 2004; Karim 2011). For
example, findings on geographical specificity suggest that when a firm’s new
name is restricted to geographical territories, then investors perceive this
negatively and penalize the firm by devaluing the stock. In this way, our study
adds to the extant literature where knowledge of a country name enhanced
investors’ familiarity with the firm and positively influenced their investment
decision (Ackert et al. 2005; Solnik and Zuo, 2012).
Similarly, contrary to our expectations, we found that when a firm removed
a family name or associated abbreviations from its name, then investors
devalued the firm’s stock. Emerging markets such as India suffer from
institutional voids because in underdeveloped institutional markets, a scarcity
of resources arises. Business houses, by virtue of operating in diversified
business segments and having well-developed internal capital markets, cope
with these voids in a better manner than stand-alone firms (Almeida and
Wolfenzon 2006). Thus, in emerging markets such as India, firms that are
associated with business groups are identified as more trustworthy and
reputable, thus raising their value for investors. When this affiliation is
reflected in the name of a firm, investors are quickly able to relate the firm to
the business group, raising the value of the firm.
Our study also indicates that as a firm remains on the stock market for a
longer period of time, investors receive additional information also about the
firm, for example its prior performance. Thus, they may not strongly respond
to name changes.
Overall, for investors, an organization’s name is not just a name, but rather
it has deeper implications. Investors quickly deduce information about a firm
 Corporate Name Change and the Market Valuation of Firms 15

based on its name. This idea contradicts previous studies, which have
suggested that an organization’s name does not render any value apart from
providing a face to a firm (Boddewyn 1967; Mase 2009; Branca and Borges
2012). Investors respond to name changes, and legitimate name changes make
information processing easier for investors by indicating various attributes of a
firm. Thus, managers could treat an organization’s name as a non-tradable
asset. In this way, the legitimization associated with a name change could
provide two major advantages. On the one hand, managers could entice
investors by leveraging a unique nomenclature; on the other hand, they could
cope with the threat of lost legitimacy by radically changing their firm name
(Kashmiri and Mahajan 2015).
It is vital for managers to understand that investors pay attention to the
surface-level information of a company. Thus, a firm’s name holds significance
for investors, and they may positively or negatively respond depending on
what type of information managers signal with a name change. If they make a
firm’s name more fluent, investors may reward the firm. On the contrary, if
they remove a family name, investors might penalize the firm by devaluing its
stock, especially in emerging markets.
The results and implications of the study are constrained by several
limitations. First, we focus on single country, and thus results cannot be
generalized across different emerging markets. Second, we do not investigate
long-term market-valuation implications. The study cannot be used for
predicting or inferring the long-term market performance of a firm with a
name change. While in developed markets extant studies have indicated an
improvement in long-term performance following a name change, this
conclusion cannot be based on mere event study analysis. Third, we used
subjective measures, that is, a general Internet search, and not a business
directory search for exploring uniqueness of a firm name, and because of this,
uniqueness scores could be biased. In future, perhaps better measures could be
introduced.

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