By January of 1999, a company called MIS International had yet to turn a profit or do any business. Its stock was trading at well below 50 cents per share.
The firm then made its first move, adopting a new name, Cosmoz.com, that would telegraph its aspirations in the blooming digital economy. The market rewarded it handsomely for the change: Its stock price soared to $5, and later cooled off to $2. Wary of the way stocks like this could lure in investors, the director of the SEC’s investor-education office told the Wall Street Journal, “Don’t invest by just a name. That is asking for losses.”
She was being admirably cautious, but she was wrong.
In 2001, when people were still sorting through the pixelated debris of the dotcom bust, three finance professors from Purdue University published a study of the fates of 95 companies that added “.com,” “.net,” or “Internet” to their names during the bubble. They found that on average, the stock prices of these companies increased 74 percent over the period of time from five days before the name-change announcement to five days afterward.
The researchers called this surge "striking," in part because the gains resulting from a name change didn't disappear over time. In other words, a company that changed its name, and nothing else, got a one-time, permanent increase in its stock price. Perhaps even more striking was the fact that this effect was spread across all the firms studied—even those that didn’t do business on the Internet.
The study’s authors, led by Michael J. Cooper, concluded that the market’s behavior indicated “a mania on the part of investors.” While evidence is scant that a name change leads to long-term gains, bubbles seem to be one of conventional wisdom’s blind spots. In the 1920s, when there was a mania over airplane-related stocks, investors lusted after shares of a company called Seaboard Airlines; only later did they find out that the company had renamed itself, and was actually in the railroad industry.
But that’s not where this story ends. Starting around mid-2000, companies began shedding the “.com” from their names, a move that one analyst explained at the time to the Associated Press as companies “distancing themselves from that smell.” Cooper, along with one of his co-authors and a crew of new researchers, then published another study, this one examining this reverse trend.
Tracking 67 firms that changed their names post-bust, the researchers found that during the period from a month before the name-change announcement until a month afterward, companies saw their stock prices rise 64 percent on average. As in Cooper's first study, a name change brought about a lasting increase in share price.
These results pointed to similar levels of irrationality, or at least ignorance, on the part of investors. The majority of the companies they studied had changed their names but not their Internet-centric business models, and these companies saw average returns of about 42 percent over the course of 60 days. There were, however, seven firms of the 67 that adopted business models less dependent on the Internet—firms that actually earned their name changes. These companies, maddeningly, didn’t see any statistically significant returns following their name changes.
Internet.com—which held a domain name that was prime real estate in its digital-manic time—was one company that successfully rode the waves of boom and bust. In 1998, it changed its name from Mecklermedia to Internet.com, and then in 2001, it changed its name again, to INTMedia Group. Its stock price jumped 54 percent after the announcement of the second change. As its CEO told the AP, “It’s window dressing for the financial community.”