> Cooper and his co-authors studied 63 companies that from the beginning
> of 1998 to March 26 of this year changed their names to include
> Web-oriented designations like ".com," ".net" or the word "Internet."
> On average, over the two weeks after their name changes were announced,
> the companies saw their shares gain 125 percent more than those of their
> peers, the study said.
> ...
> Evidence that markets are inefficient, however, doesn't mean that
> beating them is easy. From the fact that the market is sometimes
> inefficient, you can't conclude that it is always so. In fact, the
> markets remain quite efficient, especially for the stocks and bonds of
> the biggest and best-known companies.
I guess companies like WorldCOM, QualCOMM, and MetriCOM were ahead of
the curve. Can it be long before we see Microsoft.Com, Apple.Com, and
(gasp!) RedHat.Com?
-------------------------------------------------------------------------
A new academic study may finally put to rest the notion, once widely
held, that the financial markets efficiently price all securities, all
the time. Given the recent carnage in Internet-related stocks, it seems
appropriate that the study's case rests on the behavior of a group of
stocks whose issuers may have tried too hard to take advantage of
Internet mania.
It was not so many years ago that the doctrine of market efficiency, the
so-called efficient-markets hypothesis, was the prevailing orthodoxy
among this country's finance professors. Accepting the hypothesis means
accepting that all money managers' attempts to beat the markets are
doomed.
Though many people have grown skeptical of the theory, a surprising
number of believers still devote a lot of energy to explaining away any
evidence of market inefficiencies.
But this new study, "A Rose.com by Any Other Name," by Michael J. Cooper
and P. Raghavendra Rau, assistant professors of finance at Purdue
University in West Lafayette, Ind., and one of their graduate students,
Orlin Dimitrov, provides evidence of inefficiency that even the most
die-hard believers in efficient markets should find hard to dismiss.
Cooper and his co-authors studied 63 companies that from the beginning
of 1998 to March 26 of this year changed their names to include
Web-oriented designations like ".com," ".net" or the word "Internet."
On average, over the two weeks after their name changes were announced,
the companies saw their shares gain 125 percent more than those of their
peers, the study said. The authors were careful to filter out companies
whose gain could be attributed to other causes, like a good earnings
report or merger rumors.
It is very difficult to explain away this result. A name change has
nothing to do with the profitability of the company. But believers in
market efficiency are not likely to give up without a fight.
The main argument Cooper anticipates is that the new names may in fact
reflect a major shift in business -- that the companies were becoming
more involved with the Internet. The rise in their stock prices thus
would have nothing to do with the name changes per se but would instead
reflect the market's judgment about the profitability of their future
Internet business. Because this judgment is not obviously wrong on its
face, the market's behavior cannot be used to prove market inefficiency.
But the study -- available on the Web at
http://www.mgmt.purdue.edu/mcooper/newpapers/dotcom.pdf
-- was designed to pre-empt this argument. It isolated companies in the
group whose core businesses have nothing to do with the Internet and
then compared their performances with those of the companies in the
group whose core businesses were Web-related.
If the market was efficient in setting the prices of Internet stocks,
the companies with no Internet association should have experienced
smaller gains after their name changes.
Cooper found no such pattern. On the contrary, there was no difference
in the performances of these two groups of rechristened companies. The
only possible explanation is that investors have been willing to throw
their money at almost anything that claimed an Internet link.
Evidence that markets are inefficient, however, doesn't mean that
beating them is easy. From the fact that the market is sometimes
inefficient, you can't conclude that it is always so. In fact, the
markets remain quite efficient, especially for the stocks and bonds of
the biggest and best-known companies.
Most of the stocks in the study were relatively little known and had
small market capitalizations, the kind of stocks for which one would
expect the market to be least efficient.
Still, the Internet examples, though extraordinary, are not unique. The
study's authors found examples of the phenomenon dating back several
centuries. Because beating the market requires identifying pockets of
inefficiency, it is heartening to receive rigorous statistical evidence
that such pockets exist.
Mark Hulbert is editor of The Hulbert Financial Digest, a newsletter
based in Alexandria, Va. His column on investment strategies appears
every other week. E-mail: strategynytimes.com.
----
adam@cs.caltech.edu
What information consumes is rather obvious: it consumes the attention
of its recipients. Hence a wealth of information creates a poverty of
attention, and a need to allocate that attention efficiently among the
overabundance of information sources that might consume it.
-- Nobel laureate economist Herbert Simon