Anything but dotcom in a firm's name

Switching website names from dotcom to anything has paid dividends for several firms


For any dotcom looking to boost its stock price, here's one way to do it: Lose the dotcom from your name. That's enough to send stock prices soaring since Internet and high-tech stocks took a dive three years ago, claims Panambur Raghavendra Rau, an assistant professor of management at Purdue University.

Rau and his colleagues found that the stock prices of companies that dumped the dot-com extension from their names (such as Zap.com, a California-based maker of electric bicycles, which became just plain old Zap) jumped an average of 10 per cent on the day they announced the shorter name. Two days after the change, these 48 stocks were up an average of 17 per cent; a month later, they had risen 29 per cent – all due to their new names, Rau contends.

"It was as if the dotcom name was toxic," he said with a laugh. "It was as if people thought it was something different even though it was the same company it was before."

To measure the value of a name change, these researchers tracked the stock prices of 150 companies that had changed their names between June 1, 1998, and August 31, 2001. All of the companies were publicly traded on the New York or American stock exchanges, the Nasdaq or the Over-the-Counter Bulletin Board stock markets. To make the list, a company had to have adopted some form of the appellation .com (Wareforce.Com), .net (DocPlus.net Corp.), .web (Home.web Inc.), or had to have used a word in its name that suggested an Internet connection.

Then they matched each dotcom firm to one that was virtually identical in ways that might affect stock performance, including total sales, product and earnings. They also compared the movement of dotcom stock prices with the overall average of all Internet stocks in that sector. By tracking the relative performance of the former dotcom companies with their twins, researchers were able to estimate the impact of the name switcheroo on stock prices.

"The name change alone made a huge difference," Rau said. "It shouldn't have. But it did."

In an earlier paper, Rau looked at the effect of adding a dot-com variation to a corporate name before August 2000, generally considered the high-water mark for Internet stocks.

In those happier days in Silicon Valley, adding .com to a name was golden: The change alone added an extra 28 per cent to the value of the stock on the day it was announced, Rau reported in the December 2001 issue of the Journal of Finance.

Six months later, the new name was still money in the bank, inflating the price of the stock by 18 per cent over the shares of equivalent firms without dotcom names.

The power of adding a dotcom variation to a name was so great that it helped 10 companies in his sample even though they had nothing to do with the Internet – including Go-Rachels.com, a maker of gourmet potato chips that didn't even have a website when it adopted its cyber-sounding name. (Rau said something similar happened during the late 1920s, when airline stocks were soaring.

"In one case, investors rushed to purchase shares of Seaboard Airlines, which turned out to be a renamed railroad stock," he said.)

In their most recent study, Rau and his colleagues asked one additional question: If adding a dotcom extension helped stock prices during the boom years and dropping it helped during the bust, what happened to firms that did both?

It was win-win, Rau said. "They got the same bumps up. It was as if the market didn't seem to realise that they had done this before. We were just cracking up."

Rau said Internet and other tech-related stocks are particularly vulnerable to this kind of mindless movement because buyers often are day traders who spend little time researching the firms they invest in. One Harvard researcher found that the stock price of MassMutual Corporate Investors, whose ticker tape symbol is MCI, went through the roof every time the telephone giant MCI announced good news.

"People were clearly buying and selling the wrong stock," Rau said.


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