Why Susie owns Starbucks: The name letter effect in security selection

Abstract

We examine whether security selection is influenced by the name letter effect—a psychological predisposition to select items that start with leading own name letters. Two sets of tests reveal evidence that the name letter effect influences investors' security selection decisions. First, breadth of ownership (as measured by the number of institutional investors holding the security) is positively related to U.S. name letter frequency, e.g., stocks that begin with the common name letter “M” exhibit a greater number of institutional shareholders than stocks that begin with the less common name letter “X.” Second, undergraduate students managing university endowment funds are more likely to select securities for evaluation when the stock's name begins with the same letter as their name.