A Rose.com by Any Other Name

A Rose.com by Any Other NameALVIN FEBRIANO (00000009369)

ASTERINA (00000009363)

Introduction (1)

What do they say?• Financial press: corporate name changes result in

permanent value creation for firms• Analysts: investor prefer certain types of names• Karpoff and Rankine (1994): companies changing their

names earn statistically insignificant excess return• Bosch and Hirschey (1989): positive pre-announcement

effect followed by a negative post-announcement drift• Press articles: extremely large returns earned by

companies who add “.com” to their names

Introduction (2)

Mania• Abnormally elated mental state, typically characterized

by feelings of euphoria, lack of inhibitions, racing thoughts, diminishedneed for sleep, talkativeness, risk taking, and irritability

• Mackay (1841): documents manias across time and in different markets

• Sobel (1965): reports manias in the US• Common feature of manias: go with “glamour”

industries

Introduction (3)

What we investigate?The effect of company name changes to internet related “dotcom” names on the company’s stock price

Data and Methodology (1)

• Publicly traded companies on NYSE, Amex, Nasdaq, and the OTC Bulletin Board

• Period: June 1, 1998 – July 31, 1999• New name: dotcom name, dotnet name, or include

the word “internet” in it• Exclude stocks that experience a contaminating news

event (merger, issuance of stock, earning announcement)


Categories:• Pure internet companies• Companies that have some prior involvement with

the internet and change their names to better reflect this involvement

• Companies which changer their focus from non-internet related businesses to internet-related

• Companies whose core business is not internet related



• Announcement day: first available information on the name change, whether from an announcement or effective trading day

• Stock price data: www.quotecentral.com, Bloomberg, Dow Jones Interactice

• Period from t = -30 to t = + 120• Compute abnormal returns relative to a price-

matched control group

http://www.quotecentral.com/

Result – Descriptive Statistics

Data• First 5 months of 1999: over 70% of sample• Majority: category 2 & category 1• Sort the data into quartiles based on -30 day price &

volume

Result – Descriptive Statistics

Result:• Average price / share (-15 to +15): $2,79 to $4,20. Average

volume (-15 to +15) 58.943 to 70.971• Price quartiles:

Highest: $6,79 to $7,32 (7,8%) Medium: $1,76 to $3,19 (81%) Lowest: $0,41 to $1,11 (170%)

• Volume quartiles: Highest: $4,24 to $5,20 (23%) Medium: $3,44 to $4,59 (33%) Lowest: $1,70 to $3,25 (91%)

Result – Abnormal Returns?

• The dotcom effect is remarkably strong across all firms

• The increase in firm value is permanent




Robustness Check

• A characteristic describing a model's, test's or system's ability to effectively perform while its variables or assumptions are altered

• A robust concept can operate without failure under a variety of conditions.

• For statistics, a test is claimed as robust if it still provides insight to a problem despite having its assumptions altered or violated

Data Mining Concern

• Control Type I error• Type I error is the incorrect rejection of a true null

hypothesis (a "false positive")• Null Hypothesis : “There is zero abnormal return”• Boneferroni Adjustment• Seven event windows; five firm category; two panels;

three alternative event date definitions equals to 210 “event studies”

Are the result robust to outliers

• Exclude outliers on the basis of the abormal return– compute overall CAR for each firm from -30 to +120 period– Exclude all firms above the 90th percentile or below 10th

percentile• Exclude outliers on price or volume

– Same, exlude all firm above 90th percentile or below 10th percentile

• Greatest decrease in performance is seen when we exclude firms on the basis of the abnormal return as they earned over -30 to +120 day periode

Are the result robust to outliers

• Excluding firms that earn the highest and lowes 10% of abnormal return still earns the remaining firms a statiscally significant of 25% dan 45% over the 5 dan 11 day period

• Excluding firm with the lowest and highest -70% earns the remaining firms abnormal return of 60% dan 71% over the 5 dan 11 day period

• Excluding firm withe the lowest and highest -30 day volume earns statistically abnormal return of 70% dan 95%

Is this a name change effector simply a tiny firm effect

• Most firms trade on the OTCBB very small firms• Little trading on very small firms• May be possible that any news about tiny companies will have

positive effect• Create control group• Control group Group of non-internet related companies that

also change names/ticker symbols• Check the price effect on the name/ticker changes in control

group• Result suggest that the dotcom name change effect is not

simply attributable to the arrival of any news of small firm, but rather an Internet related dotcom effect


Addition• Calculated capitalization weighted CAR in sample

firms using approximation for the firm’s event day capitalization

• Event day capitalization is not available• Obtain number of shares via Bloomberg• Back out the number of shares, taking account stock

split


Result of Additional C.3 Test• Estimate -30 to +30 capitalization CARS by weighting

each firm’s daily return by firm relative capitalization• Placing greater weight on the returns of larger firms• Day -30 to +30 Inter@ctive adjusted CARS 59% (t-

statistic = 3,34)• Day -5 to +5 Inter@ctive adjusted CARS is 27% (t

statistic = 3,67)

Do the Stocks Have High Beta

Table 2; Panel A• Pre event runup in

returns• Statistically

significant CAR of 31%


Why pre-event runup in returns? • Information leakage• Actual announcement date is different from

identified event date• Company have high beta


Compute beta of 95 firms from -90 to -30 using AMEX Inter@ctive Week Internet IndexRequirement• Firm have no more than 25% missing return• 19 out of 95 firm

Result• Average median beta is 0,74 (0,85)• AMEX Inter@ctive market-model adjusted CAR in -2 to +2

window is 35% ( t statistic = 5,48)• AMEX Inter@ctive market-model adjusted CAR in -2 to +2

window is 62% ( t statistic = 6,42)

Is This Effect Caused byMomentum or Bid-Ask Bunce?

• Momentum is one alternate explanation for high abnormal returns earned by name change firms

• Checked by computing correlation between– AMEX Inter@ctive Week Internet indexed adjusted CAR

earned by firm over day -30 to day 0 – AMEX Inter@ctive Week Internet indexed adjusted CAR

earned by firm over day +1 to day +30• Result is -0,059 (p-value = 0,671)• Momentum does not seem to be driving the

results


• Other alternative explanation is: Upward bias in calculated CARs

• Possible Cause/Source– A Failure to adjust for transaction cost emanating

from bid-ask spread– A bid-ask bounce effect


• Collect (if available) bid-ask spread data from bloomberg for 95 firms in sample for Event date; Day -30; and Day +30

• Estimate AMEX Inter@ctive Week adjusted CARs by inversely weighting each firm by its relative event bid-ask spread

• Estimate an average excess holding period return (HPR) • Result

– Firms with smaller relative bid-ask spreads experience a greater dotcom effect

– Dotcom effect is robust to a microstructure induced upward bias in return

Is the Dotcom Effect Robust AcrossShifts in Investor Sentiment

• Are reactions to dotcom name changes robust across down and up market period?

• Compare the size of the dotcom effect across up and down periods

Is the Dotcom Effect Robust AcrossShifts in Investor Sentiment

How??• Calculating monthly index return for the AMEX Inter@ctive Week

Internet Index for 15 months (June 1998 to July 1999)• Ranking the months according to average return on the index• 45 firms announced name in “up” market• 50 firms announced name in “down” market• Firms earned 96% in up months• Firms earned 47% in down months• Differents is large in magnitude but statistically not significant• Dotcom effect appears to be robust across “up” and “down”

market

• Majority of firms in sample are small firm • Investor are unaware of the firm’s involvement with

the Internet• Switching to dotcom name is a swift, inexpensive

method, to signal involvement with internet• When investors realize it, they apply a “premium” to

the company stock• Evidence that market is not semi-strong efficient

The Dotcom Effect: Is It a Rational Response or Evidence of an Irrational Bubble

• Is dotcom effect consistent with a loose definition of market efficiency??

TestingExamine relation between – abnormal returns and the extent to which the firms is an

internet firm– How much of the firm’s business is derived from the

internet



Result• In shorter horizons market participants appear to

apply a similiar positive price premium across all firms changing their name to dotcom names, regardless firms’ level of involvement with the internet

• In the longer horizons, firms that have less involvement with the Internet have the greatest returns following a dotcom name change


• Do firms attempt to take advantage of a perceived investor passion for Internet Stocks, clustering their name changes in “hot” market period?

• Managers may also perceive the existence of hot market periods in investor sentiment for Internet stocks and cluster their name changes in these periods

Conclusion

• It’s been found that companies which change their name to a dotcom name earn a significant abnormal returns on the order of 53% for the five days around the announcement date

• That effect is not transitory, no post-event negative drift

• The result in this research is argued to be driven by a degree of investor mania

• Investors seem to be eager to be associated with the internet at all cost

Conclusion

• Announcement return are similiar across all firms, regardless of the company’s actual involvement with the Internet

• Evidence in this paper lends more support to the investor mania hypothesis than to the rational pricing hypothesis

Documents

A Rose.com by Any Other Name