A recent article in The Economist, summarizing an AER paper, presents evidence for better financial performance by companies that share names with their founder-owners than firms that do not. The outperformance is more pronounced for relatively unusual names. On the flip side, performance differences seem to wane as companies age. The academic paper examined data for approximately 1.8 million European firms over 2002-2012 (more than 6 million “firm-years”), of which about a fifth of the firms were named after the entrepreneur. Return on assets for companies that were named after the majority owner exceeded those that were not by 3%, an increase of between 36% and 56% from the average ROA observed for the entire sample.
Consider a world in which founders and their firms come in two flavors – high quality and low quality. Markets reward high-quality founders and firms more over time but lack a priori information on the type of the firm (presumably, founders are aware of their type). The paper posits that business-owners, particularly of young companies, signal their superior type to overcome the information asymmetry by naming the company after themselves. The reputational risk of being associated with a failed enterprise likely discourages the low-quality founders from using their own names for their firms. Greater outperformance by companies named after founders with more unusual names further underscores the value of using their own names to signal type.
Using the name of a firm to self-express or guess the quality of the founders/entrepreneurs is particularly useful because firm-naming is:
- A choice available to all entrepreneurs
- A highly-visible choice
- An early decision in the life of the company, one that is less likely to have been subject to the influences of employees and investors
Application to Purchase Accounting
At the time of an acquisition, do firms named after their owners have a more valuable tradename?1
Tradenames are valuable if customers associate the name with products or services that are of higher quality than alternate offerings. For the acquiring firm, such an association can lead to greater financial returns. However, a market participant acquirer will likely pay (up) for the privilege of continuing to use the founder’s name only if she expects the superior financial performances, as well as the signaling benefits, will be transferable.
- Are such transfers possible? The paper provides some (weak) insight on this question. For a small subset of companies that changed their names following an ownership change, having the founder’s name as the firm name was not associated with differential (superior/inferior) financial performance.
- Are such transfers the norm? Not necessarily. After all, the acquirers do not always retain use of the acquired tradenames.
The professionals at Mercer Capital value trademarks and trade names of companies operating in numerous industries. Please contact us to find out how we can help you measure the fair value of acquired intangible assets.
- What’s in a Name: Valuing Trademarks and Trade Names
- A Game of Names: Licensing and Tradename Valuation
- Lands’ End and Trade Name Impairment
- Getting Brand Intangibles Right
1 The paper suggests that consultants generally advise against naming the company after the founder/entrepreneur because they believe doing so reduces resale value (and indicates lack of creativity).
Mercer Capital’s Financial Reporting Blog
Mercer Capital monitors the latest financial reporting news relevant to CFOs and financial managers. The Financial Reporting Blog is updated weekly. Follow us on Twitter at @MercerFairValue.