The impact of name changes on company value

Abstract

PurposeThe purpose of this paper is to examine the effect of name changes on the value of UK companies. Previous research in the USA suggests that there is little effect associated with a name change, except for a small sample of Dot Com companies.Design/methodology/approachThis study uses an event study methodology to measure the short‐term abnormal returns associated with the announcement of company name changes. It uses a calendar time methodology to measure the corresponding long‐term abnormal returns. It distinguishes between amendments and radical name changes, as well as those that signal that a firm is diversifying or re‐focusing.FindingsContrary to the existing research, there is evidence of consistent abnormal returns following name change announcements, particularly when a distinction is made between amendments and radical name changes, and whether the name change reflects a company that is diversifying or re‐focusing.Research limitations/implicationsThis research suggests that companies should reflect on the nature of a proposed name change. Company name changes that drop part of an existing name are not well received by shareholders, whereas those that add to the existing name are. In addition, adding or dropping the term “group” from a company's name can also have considerable effects on the share price, both in the short and long run.Practical implicationsThis paper shows that shareholders' perceptions of the implications of a company's name change are important. Name change announcements should therefore be regarded as influential signals to investors.Originality/valueThis paper finds significant abnormal returns associated with company name change announcements. Further, it shows that the type of name change is important in determining the sign of these resulting abnormal returns.