Managerial actions
in response to a market downturn: Valuation effects of
name changes in the dot.com decline
P. Raghavendra Rau, Ajay Patel, Igor Osobov, Ajay Khorana,
and Mike Cooper
Purdue University, Wake Forest University and University
of Virginia
In this paper, we investigate investor reactions to
internet related name changes in a market downturn. We
find that during the Internet boom period, there is a
surge of dot.com additions while in the bust period,
there is a dramatic reduction in the pace of dot.com
additions accompanied by a rapid increase in dot.com
name deletion activity. Using a new sample of dot.com
additions, we find a positive announcement effect following
dot.com additions from 1999 - 2000. However, post mid-year
2000, the effect dramatically reverses. After August
2000, investors react positively to name changes for
firms that remove dot.com from their name. This dot.com
deletion effect produces cumulative abnormal returns
on the order of 70 percent for the sixty days surrounding
the announcement day. Thus, in the initial life cycle
of a bubble, investors appear to be deceived by firms
that attempt to associate themselves with the current
glamour industry. Later, after the "bubble bursts," investors
appear to apply a negative pricing premium to firms still
associated with the toxic industry, prompting firms to
remove the dot.com from their names, deceiving investors
once more, and earning a large return premium merely
from a name change. This paper adds support to a growing
body of literature that documents that investors are "irrationally" influenced
by cosmetic effects.
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