Can a company boost the trading activity and liquidity of its stock by changing its name up in the alphabet? Evidence of alphabetical bias from the US stock market
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School of Business |
Master's thesis
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Date
2017
Department
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Degree programme
Finance
Language
en
Pages
66
Series
Abstract
Purpose of study The undeniably common and seemingly harmless convention of alphabetization appears to benefit those with initials early in the alphabet. The analysis of Jacobs and Hillert (2016) alongside anecdotal evidence imply that a company could affect stock market outcomes by simply adopting an early alphabet name. Against this, I study whether a company can boost the trading activity and liquidity of its stock by changing its name up in the alphabet. I specifically focus on examining whether the type of name change, firm visibility proxied by firm size, and the name change time regulate the effects of alphabetical bias. Data and methodology I collect data on NYSE, NYSE MKT, and Nasdaq listed companies that change their name at least once between 1980 and 2015. In the baseline analysis, I use turnover as a proxy for trading activity and Amihud (2002) illiquidity for liquidity. To quantify the alphabetical distribution of company names, I calculate the relative alphabetical ranking of stocks in the applicable stock universe in each month (continuous position). The overall sample consists of 932 name changes, which, again, corresponds to 90,711 stock–month observations. With this, I run firm-fixed effect panel regressions of trading activity and liquidity on continuous position and a set of firm-specific characteristics that have been suggested as determinants of trading activity and liquidity. Results The results of the high-level analysis neither fully corroborate nor oppose the idea that a company could boost the trading activity and liquidity of its stock by changing its name up in the alphabet. More specific tests, however, yield interesting findings. First, for the name changes up from the bottom 75 % of alphabetically ordered stocks to the top 25 % of stocks, the results imply that the very top listed stocks enjoy some 22 % (21 %) higher trading activity (liquidity) than the bottom listed stocks. Also, for below mid-cap and mid-cap name changers, the vanguard of stocks appears to enjoy some 9 % (12 %) higher trading activity (liquidity) than the rearguard. The analysis of stock- level trading activity and liquidity over time does not provide evidence of a time-dependent, alphabetical bias related trend. The results are robust in respect to alternative treatment of the dependent variables, measures of trading activity and liquidity, and model specifications.Description
Thesis advisor
van Bommel, JosKeywords
trading behaviour, primacy effect, alphabetical bias, name effect