The Frontal Cortex

Stocks and Names

When it comes to stocks, ticker symbols seem to be extremely important. Instead of evaluating a company’s financial fundamentals, investors get seduced by cute abbreviations. As the WSJ notes:

For at least two years, Harley-Davidson Inc.’s investor-relations folks had thought about it: Their ticker symbol, HDI, wasn’t exactly evocative of the motorcycle maker’s image. And there was something better available: HOG, biker-slang term for a Harley motorcycle.

Something surprising has happened since Harley-Davidson adopted the symbol in mid-August: Its shares have gained nearly 16%, compared with about 4% for the Standard & Poor’s 500-stock index.

It wasn’t the first time a stock has risen after adopting a catchy ticker symbol. Counterintuitive as it may seem, research suggests that companies with clever symbols do better than other companies. Any suggestion of a cause-and-effect relationship may be hokum, but tickers that make investors chuckle — think Sotheby’s BID, Advanced Medical Optics Inc.’s EYE or the apt PORK of Premium Standard Farms Inc. — also may make them richer, at least for a time.

The studies do nothing to prove that a stock’s ticker symbol has any influence on its price, and a ticker symbol certainly shouldn’t rank high on an investor’s crib notes for stock-picking. But the research may offer some insight into investor psychology and the importance of being memorable.

In one study, published in June in the Proceedings of the National Academy of Sciences, researchers at Princeton University found that companies with pronounceable symbols do better soon after an IPO than companies with symbols that can’t be said as a word.

Princeton’s Adam Alter and Daniel Oppenheimer looked at nearly 800 symbols that debuted on the New York Stock Exchange and the American Stock Exchange between 1990 and 2004 and divided them according to whether their symbol was pronounceable (like Rite Aid Corp.’s RAD) or not (like Reader’s Digest Association Inc.’s RDA). They found investing $1,000 in the pronounceable stocks at the start of their first day of trading would have made you $85.35 more in that day than investing in unpronounceable ones.

A separate study suggests even longer-lasting effects. Pomona College finance Professor Gary Smith asked participants to rate ticker symbols according to “cleverness.” From 1984 to 2004, a portfolio of stocks people considered the cleverest returned 23.6% compounded annually, compared with 12.3% for a hypothetical index of all NYSE and Nasdaq stocks. The clever stocks included such well-known stocks as Anheuser Busch Cos.. (BUD) and Southwest Airlines Co. (LUV), along with companies eventually delisted or acquired, such as Grand Havana Enterprises Inc. (PUFF) and Lion Country Safari (GRRR).

So much for the efficient market hypothesis.

Comments

  1. #1 S Sherman
    September 12, 2011

    Great information once again! I am looking forward for your next post.

  2. #2 Josie Gellar
    November 21, 2011

    Thanks for all your efforts that you have put in this. very interesting info . “If a man writes a book, let him set down only what he knows. I have guesses enough of my own.” by Johann Wolfgang von Goethe.