Fine Feathers Make Fine Birds? Wealth Effects and the Choice between Major and Minor Corporate Name Changes

Abstract

This study is the first to investigate the causes and effects of corporate name changes in Continental Europe using a sample of German firms in the period 1997-2009. We report a positive and significant stock market reaction to announcements of corporate name changes considerably different for major and minor name changes. Regression results show that prior firm performance positively affects the observed stock returns. Short-term effects turn out to be transitory as firms significantly underperform the German CDAX in the year after the name change was announced. As the first study, we examine the impact of performance and corporate governance on the probability of corporate name changes and show that managers react to poor firm performance by implementing more expensive major name changes. This can be interpreted as an attempt to cloud poor past performance of both the firm and the management. Accordingly, we document a positive relation between management influence, available cash, and the probability of major name changes.