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We document that regulatory enforcement actions for financial misrepresentation cluster in industry-specific waves and that wave-related enforcement has information spillovers on industry peer firms. Waves and spillovers have significant effects on share prices. Early-wave target firms have the largest short-run losses in share values and the largest information spillovers on industry peer firms. Late-wave targets’ short-run losses are smaller, but not because they involve less costly instances of misconduct. Rather, late-wave targets are subject to more information spillovers from earlier in the wave. These results indicate that prices incorporate changes in the likelihood that a firm will face wave-related enforcement action for financial misconduct. Short-window share-price losses understate the total share-price impact, particularly for firms whose financial misrepresentation is revealed late in an enforcement wave. This paper was accepted by David Simchi-Levi, finance. Supplemental Material: The internet appendix and data are available at https://doi.org/10.1287/mnsc.2023.4711 .

We document that the relation between firm value and the use of takeover defenses is positive for young firms but becomes negative as firms age. This value reversal pattern reflects specific changes in the costs and benefits of takeover defenses as firms age and arises because defenses are sticky and rarely removed. Firms can attenuate the value reversal by removing defenses, but do so only when the defenses become very costly and adjustment costs are low. The value reversal explains previous mixed evidence about takeover defenses and implies that firm age proxies for takeover defenses’ heterogeneous impacts on firm value. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Shareholder perks are in-kind gifts or purchase discounts that disproportionately reward small shareholders. Data from Japanese firms indicate that firms initiating perk programs attract individual retail shareholders and experience increases in share values. We find support for three channels by which perks increase firm value: an increase in share liquidity, a decrease in the equity cost of capital, and signaling to investors. A fourth channel, by which perks help to market the firm’s products to consumers, receives mixed support. We do not find evidence that perk programs work to entrench managers.

We propose a construct, the Trust Triangle, that highlights three primary mechanisms that provide ex post accountability for opportunistic behavior and motivate ex ante trust in economic relationships. The mechanisms are (i) a society’s legal and regulatory framework, (ii) market-based discipline and reputational capital, and (iii) culture, including individual ethics and social norms. The Trust Triangle provides a framework to conceptualize the relationships between trust, corporate accountability, legal liability, reputation, and culture. We use the Trust Triangle to summarize recent developments in the empirical finance literature that examine how trust is formed and how trust, or its absence, affects financial markets, firm performance, and the incidence of financial fraud. To date, most studies examine only one leg of the Trust Triangle in isolation. The evidence, however, indicates that all three legs of the Trust Triangle have first-order effects on a wide range of financial outcomes and that they are interrelated. Attempts to model trust and trustworthiness that do not incorporate all three aspects of the Trust Triangle will therefore miss essential aspects of the basic economic problem of how counterparties overcome the risks of moral hazard, asymmetric information, and opportunism to engage in mutually beneficial exchange and production activities. We focus especially on culture-related mechanisms, a recently developed area in empirical finance research that has potential to influence the more established research on laws and reputation.

We argue and demonstrate empirically that a firm's institutional and legal context has first‐order effects in tests that use state antitakeover laws for identification. A priori, the size and direction of a law's effect on a firm's takeover protection depends on (i) other state antitakeover laws, (ii) preexisting firm‐level takeover defenses, and (iii) the legal regime as reflected by important court decisions. In addition, (iv) state antitakeover laws are not exogenous for many easily identifiable firms. We show that the inferences from nine prior studies related to nine different outcome variables change substantially when we include controls for these considerations.

Financial reporting fraud and other forms of financial reporting misconduct are a significant threat to the existence and efficiency of capital markets. This study reviews the literature on financial reporting misconduct from the perspectives of law, accounting, and finance. Our goals are to establish a common language for researchers interested in this line of research, describe the main findings and challenges in these literatures, and provide directions for future research. Although research on financial reporting misconduct faces challenges, those challenges provide significant opportunities to advance the literature, as the answers to many questions on financial reporting misconduct remain unsettled.

We summarize and synthesize the results from 73 studies that examine the consequences of shareholder activism for targeted firms, and draw two primary conclusions. First, activism that adopts some characteristics of corporate takeovers, especially significant stockholdings, is associated with improvements in share values and firm operations. Activism that is not associated with the formation of ownership blocks is associated with insignificant or very small changes in target firm value. Second, shareholder activism has become more value increasing over time. Research based on shareholder activism from the 1980s and 1990s generally finds few consequential effects, while activism in more recent years is more frequently associated with increased share values and operating performance. These results are consistent with Alchian and Demsetz' (1972) argument that managerial agency problems are controlled in part by dynamic changes in ownership, and with Alchian's (1950) observation that business practices adapt over time to mimic successful strategies.

Many researchers use the G-index or E-index to measure firms’ takeover defenses. Others argue that these indices are not related to firms’ takeover likelihoods. We find that, unlike their raw values, the instrumented versions of these indices are significantly and negatively related to acquisition likelihood. The difference between the raw and instrumented results indicates that the G-index and E-index include an endogenous component and highlights the importance of accounting for endogeneity in tests that use takeover indices to measure takeover deterrence. We provide data on new instruments that researchers can use to address these issues.Received April 13, 2016; editorial decision October 14, 2016 by Editor David Dennis.

An extensive literature examines the causes and effects of financial misconduct based on samples drawn from four popular databases that identify restatements, securities class action lawsuits, and Accounting and Auditing Enforcement Releases (AAERs). We show that the results from empirical tests can depend on which database is accessed. To examine the causes of such discrepancies, we compare the information in each database to a detailed sample of 1,243 case histories in which regulators brought enforcement actions for financial misrepresentation. These comparisons allow us to identify, measure, and estimate the economic importance of four features of each database that affect inferences from empirical tests. We show the extent to which each database is subject to these concerns and offer suggestions for researchers using these databases. JEL Classifications: G38; K22; K42; M41.

Is financial fraud becoming a bigger or smaller problem over time? Current empirical approaches to this question generate mixed inferences. As an alternative, I use two theoretical constructs that isolate several factors that motivate fraud, and use them to consider the impact of technological and wealth changes over time. Some changes, such as an increase in anonymity in some financial transactions, facilitate new fraud innovations and increase the possibility of fraud. The COVID-19 pandemic and resulting economic shutdown has fostered major disruptions in relative demands and organizational capital that also increase the likelihood of fraud over the next few years. Viewed over a longer time scale, however, the majority of technological and wealth changes seem likely to increase the use and effectiveness of reputational capital, third-party enforcement, and ethical motivations as fraud deterrents. I predict that, on net, these changes will drive a long-term decrease in the incidence of fraud., Highlights • Is financial fraud becoming a bigger or smaller problem over time? • Current empirical approaches to this question generate mixed inferences. • As an alternative, I use two theoretical constructs that isolate several factors that motivate fraud, and use them to consider the impact of technological and wealth changes over time. • Some changes, such as an increase in anonymity in some financial transactions, facilitate new fraud innovations and increase the possibility of fraud. • The COVID-19 pandemic and resulting economic shutdown has fostered major disruptions in relative demands and organizational capital that also increase the likelihood of fraud over the next few years. • Viewed over a longer time scale, however, the majority of technological and wealth changes seem likely to increase the use and effectiveness of reputational capital, third-party enforcement, and ethical motivations as fraud deterrents. • I predict that, on net, these changes will work to drive a long-term decrease in the incidence of fraud.

We use a comprehensive database of regulatory enforcement actions for financial misrepresentation and apply Receiver Operating Characteristics theory to construct a misrepresentation prediction model. The model performs well both in and out of sample, with an average area under the curve (AUC) of 0.78 in out-of-sample tests. The model’s base case implies that 22.3% of Compustat-listed firms are engaged in financial misrepresentation that is potentially sanctionable by regulators in an average year. The average violation period is 3.1 years, implying that 7.2% of firms initiate new programs of financial misrepresentation each year. Of these, 3.5% eventually are caught and sanctioned. These findings yield numerical estimates of the size of the price distortions imposed by misrepresentation on the shares of both misrepresenting and non-misrepresenting firms, and the size of firms’ ex ante expected costs – incorporating both the probability of getting caught and the penalties if caught – of engaging in financial misrepresentation.

Garrett Hardin’s “The Tragedy of the Commons” (Hardin, 1968) is widely influential but conceptually flawed. Hardin characterizes the commons problem as arising from the exercise of free will in a world with limited carrying capacity. Hardin’s solutions to this problem emphasize coercive policies, including traditional command-and-control environmental and natural resource regulations. In contrast, the property rights literature that preceded Hardin – especially Gordon (1954), Scott (1955), Coase (1960), Alchian (1965), and Demsetz (1967) – shows that the commons problem arises from non-exclusive use rights. Non-exclusivity is part of a broader class of restrictions on private ownership, any of which fosters dissipative rent seeking. The property rights literature focuses on value creation rather than just the physical exhaustion of the commonly owned resource. It is therefore more general, and highlights solutions that are less coercive and dissipative, than the more widely known views espoused by Hardin.

In a 2016 paper (Fang, Huang, and Karpoff, 2016), we report that firms exposed to an increase in the prospect of short selling during the Reg SHO pilot program have lower discretionary accruals during the pilot period. Black, Desai, Litvak, Yoo, and Yu (2019, hereafter, BDLYY) argue that this result is not replicable. We show that BDLYY’s claim is incorrect. The accruals result previously was replicated in papers by Massa, Zhang, and Zhang (2015) and Heath, Ringgenberg, Samadi, and Werner (2019), and is easily replicable using data and code that we have shared widely since 2014 – including with the BDLYY team in 2015 – and that we recently posted publicly. The accruals result also is robust to a wide range of specification changes, including those implied by the BDLYY paper, which include: various measures of performance-matched discretionary accruals and total accruals; using our original 2012 Compustat data or currently available 2019 Compustat data; including both firm and year fixed effects; including or excluding other covariates in the difference-in-differences (DiD) tests; and using unbalanced rather than balanced panels. We conjecture that BDLYY’s results are inconsistent with prior results because they rely partly on non-standard accruals measures and/or use samples that differ from those used by Fang et al. (2016), Massa et al. (2015), and Heath et al. (2019). We conclude by discussing two theoretical concerns. First, we reiterate that an observed increase in short selling during the Reg SHO period is neither necessary nor sufficient to establish that the prospect of short selling has a disciplinary effect on earnings management, as managers’ endogenous adjustments affect short sellers’ opportunities and observed short selling. Second, we discuss a concern that the Reg SHO change appears to be too small to explain a wide range of firm outcomes, as recent empirical findings suggest.

We examine the labor market consequences for directors who adopt poison pills. These directors experience a decrease in shareholder votes, an increase in termination rates across all their directorships, and a decrease in the likelihood of new board appointments. These adverse consequences accrue especially when pill adoption is costly for the firm and are not attributable to firm-specific events that can motivate pill adoptions. Firms have positive stock price reactions when pill-associated directors die or depart from their boards, compared to zero returns for other directors. We conclude that pill-adopting directors experience a decrease in the value of their services.

Antitakeover provisions play a central role in corporate governance research. But there is little agreement over which, if any, provisions affect takeover likelihoods. As a result, researchers variously use the G-index, E-index, ad hoc indices, or selected individual provisions such as classified boards, to measure firms’ takeover defenses. In tests that account for the endogenous use of antitakeover provisions, we find that only 11 of the 24 G-index provisions are negatively related to takeover likelihood. Various indices used in the literature to measure takeover defense relate to takeover likelihood to the extent they include this subset of provisions.

We propose and test an efficiency explanation for why firms deploy takeover defenses using initial public offering (IPO) firm data. We hypothesize that takeover defenses bond the firm׳s commitments by reducing the likelihood that an outside takeover will change the firm׳s operating strategy and impose costs on its business partners. Consistent with this hypothesis, we find that IPO firms deploy more takeover defenses when they have important business relationships to protect. An IPO firm׳s use of takeover defenses is positively related to the longevity of its business relationships. IPO firms’ use of takeover defenses creates positive spillovers for their large customers. And IPO firms’ valuation and subsequent operating performance are positively related to their use of takeover defenses when they have important business relationships.

We document the frequent use of lockup agreements in seasoned equity offerings (SEOs) and examine the determinants of their use, duration, and early release. We find that the likelihood of an SEO lockup and its duration are positively related to issuer information asymmetry measures. Lockup duration is negatively related to underwriter spreads and underpricing, indicating that lockups lower expected flotation costs. Lockups are frequently released early following share prices rises. We conclude that lockups represent a contracting solution to asymmetric information and agency problems that plague equity issues by helping to insure SEO quality and deter opportunistic insider trading.

We propose a construct, the Trust Triangle, that highlights three primary mechanisms that provide ex post accountability for opportunistic behavior and motivate ex ante trust in economic relationships. The mechanisms are: (i) a society’s legal and regulatory framework, (ii) market-based discipline and reputational capital, and (iii) culture, including individual ethics and social norms. The Trust Triangle provides a framework to conceptualize the relationships between trust, corporate accountability, legal liability, reputation, and culture. We use the Trust Triangle to summarize recent developments in the empirical finance literature that examine how trust is formed and how trust, or its absence, affects financial markets, firm performance, and the incidence of financial fraud. To date, most studies examine only one leg of the Trust Triangle in isolation. The evidence, however, indicates that all three legs of the Trust Triangle have first-order effects on a wide range of financial outcomes and that they are interrelated. Attempts to model trust and trustworthiness that do not incorporate all three aspects of the Trust Triangle will therefore miss essential aspects of the basic economic problem of how counterparties overcome the risks of moral hazard, asymmetric information, and opportunism to engage in mutually beneficial exchange and production activities. We focus especially on culture-related mechanisms, a recently developed area in empirical finance research that has potential to influence the more established research on laws and reputation.

We argue and demonstrate empirically that institutional and political economy considerations have first-order effects in tests that use state antitakeover laws for identification. A priori, the size and direction of a law’s effect on a firm’s takeover protection depends on (i) other state antitakeover laws, (ii) pre-existing firm-level takeover defenses, and (iii) the legal regime as reflected in important court decisions. In addition, (iv) state antitakeover laws are identifiably not exogenous for many firms. We show that the inferences from nine prior studies relating to nine different outcome variables change substantially when we include controls for these considerations.

We examine whether short sellers detect firms that misrepresent their financial statements, and whether their trading conveys external costs or benefits to other investors. Abnormal short interest increases steadily in the 19 months before the misrepresentation is publicly revealed, particularly when the misconduct is severe. Short selling is associated with a faster time-to-discovery, and it dampens the share price inflation that occurs when firms misstate their earnings. These results indicate that short sellers anticipate the eventual discovery and severity of financial misconduct. They also convey external benefits, helping to uncover misconduct and keeping prices closer to fundamental values when firms provide incorrect financial information.

We propose and test the hypothesis that takeover defenses confer costs and benefits to a firm’s shareholders that change in systematic ways as a firm ages. In particular, the cost of managerial entrenchment increases as managerial ownership declines, and the benefits of stakeholder bonding via takeover defenses decrease, as a firm grows and diversifies. A value-maximizing response to such changes would be for firms to shed takeover defenses as they age. We document, however, that firms’ use of takeover defenses is sticky, as the likelihood of a firm keeping its current takeover defenses in any given year is 98%, and 90% of firms never remove any takeover defenses during the 15 years after their IPOs. As a result of such stickiness, takeover defenses that enhance value at the firm’s IPO tend to become costly over time. Consistent with this hypothesis, we find that the average relation between firm value and the use of defenses is positive at the IPO but declines and becomes negative as the firm ages. The decline is most pronounced among firms that deploy the most sticky defenses, for which the bonding benefits decrease over time, and for which entrenchment costs increase.

This data appendix discusses the methods utilized to create the dataset used in The Lifecycle of Takeover Defenses (Johnson, Karpoff, and Yi, 2016).

This is the Internet Appendix for The Lifecycle of Takeover Defenses (Johnson, Karpoff, and Yi, 2016).

This paper examines the sizes of the fines, damage awards, remediation costs, and market value losses imposed on companies that violate environmental regulations. Firms that violate environmental laws suffer statistically significant losses in the market value of firm equity. The losses, however, are of similar magnitudes to the legal penalties imposed, and in the cross section, the market value loss is related to the size of the legal penalty. Thus, environmental violations are disciplined largely through legal and regulatory penalties, not through reputational penalties.

Many researchers use the G-index and E-index to measure firms’ takeover defenses. Others argue that these indices are not related to firms’ takeover likelihoods. We develop predetermined instruments for a firm’s use of takeover defenses and report the first direct evidence that the G-index and E-index – as constituted and used in the literature – are negatively related to acquisition likelihood. The evidence is robust to a variety of specifications and methodologies. These results support studies that use the G-index and E-index to measure firms’ takeover defenses. We also provide data on new and plausibly exogenous instruments for firms’ takeover defenses.

Shareholder perks are in-kind gifts or purchase discounts made available to shareholders and are common at many firms. Shareholder perks return value to investors in a way that disproportionally rewards small shareholders. Using data from Japanese firms, we show that firms initiating perk programs attract small individual shareholders and decrease the concentration of share ownership. Firms that initiate perk programs experience an increase in value, an increase in share liquidity, and a decrease in the equity cost of capital. We infer that perk programs serve shareholder interests at the firms that adopt them.

Many firms deploy takeover defenses when they go public. IPO managers tend to deploy defenses when their compensation is high, shareholdings are small, and oversight from nonmanagerial shareholders is weak. The presence of a defense is negatively related to subsequent acquisition likelihood, yet has no impact on takeover premiums for firms that are acquired. These results do not support arguments that takeover defenses facilitate the eventual sale of IPO firms at high takeover premiums. Rather, they suggest that managers shift the cost of takeover protection onto nonmanagerial shareholders. Thus, agency problems are important even for firms at the IPO stage.

From 1818 to 1909, 35 government and 57 privately-funded expeditions sought to locate and navigate a Northwest Passage, discover the North Pole, and make other significant discoveries in arctic regions. Most major arctic discoveries were made by private expeditions. Most tragedies were publicly funded. By other measures as well, publicly-funded expeditions performed poorly. On average, 5.9 (8.9%) of their crew members died per outing, compared to 0.9 (6.0%) for private expeditions. Among expeditions based on ships, those that were publicly funded used an average of 1.63 ships and lost 0.53 of them. Private ship-based expeditions, in contrast, used 1.15 ships and lost 0.24 of them. Of public expeditions that lasted longer than one year, 47% were debilitated by scurvy, compared to 13% for private expeditions. Although public expeditions made some significant discoveries, they did so at substantially higher cost (as measured by crew size or vessel tonnage) than private discoveries. Multivariate tests indicate that these differences are not due to differences in the exploratory objectives sought, country of origin, the number of previous expeditions on which the leader served, or the decade in which the expedition occurred. Rather, they are due to systematic differences in the ways public and private expeditions were organized. Historical accounts indicate that, compared to private expeditions, public expeditions: (1) employed leaders that were relatively unmotivated and unprepared for arctic exploration; (2) separated the initiation and implementation functions of executive leadership; and (3) adapted slowly to new information about clothing, diet, shelter, modes of arctic travel, organizational structure, and optimal party size. These shortcomings resulted from, and contributed to, poorly aligned incentives among key contributors.

Fraud scandals can create incentives to change managers in an attempt to improve the firm's performance, recover lost reputational capital, or limit the firm's exposure to liabilities that arise from the fraud. It also is possible that the revelation of fraud creates incentives to change the composition of the firm's board, to improve the external monitoring of managers, or to rent new directors' valuable reputational or political capital. Despite such claims, we find little systematic evidence that firms suspected or charged with fraud have unusually high turnover among senior managers or directors. In univariate comparisons, there is some evidence that firms committing fraud have higher managerial and director turnover. But in multi-variate tests that control for other firm attributes, such evidence disappears. These findings indicate that the revelation of fraud does not, in general, increase the net benefits to changing managers or the firm's leadership structure. Copyright 1999 by the University of Chicago.

Press reports of investigations of fraud, indictments, and suspensions in military procurement are associated with significantly negative average abnormal returns in the stocks of affected firms. Abnormal stock returns are significantly less negative, however, for firms ranking among the top 100 defense contractors than for unranked contractors, even after one controls for firm size, the frauds' characteristics, and the firm's recidivism. Unranked contractors are penalized heavily for procurment frauds, experiencing both a decline in market value and a subsequent loss in government‐derived revenues. Furthermore, these losses are related to the percentage of the firm's revenues that derive from government contracts. Influential contractors, in contrast, are penalized lightly, experiencing negligible changes in share value and government contract revenue.

Shareholder-initiated proxy proposals on corporate governance issues became popular in the late 1980s as corporate takeover activity declined. We find firms attracting governance proposals have poor prior performance, as measured by the market-to-book ratio, operating return, and sales growth. There is little evidence that operating returns improve after proposals. The proposals also have negligible effects on company share values and top management turnover. Even proposals that receive a majority of shareholder votes typically do not engender share price increases or discernible changes in firm policies.

During 2005 to 2007, the SEC ordered a pilot program in which one-third of the Russell 3000 index were arbitrarily chosen as pilot stocks and exempted from short-sale price tests. Pilot firms’ discretionary accruals and likelihood of marginally beating earnings targets decrease during this period, and revert to pre-experiment levels when the program ends. After the program starts, pilot firms are more likely to be caught for fraud initiated before the program, and their stock returns better incorporate earnings information. These results indicate that short selling, or its prospect, curbs earnings management, helps detect fraud, and improves price efficiency.

Proponents of state antitakeover legislation argue that previous empirical tests by financial economists of the wealth effects of Pennsylvania's 1990 antitakeover law are biased. We show that the proponents are correct. In particular, firm size, event-time clustering, and non-synchronous trading effects account for the wealth decreases reported in earlier studies. We also show, however, that both proponents and critics of the Pennsylvania legislation have ignored the earliest press release about it. The wealth effect associated with this announcement is negative, large, and statistically significant. These results therefore are consistent with the hypothesis that the Pennsylvania law decreased company values and with the hypothesis that the initial market reaction is an unbiased estimate of the law's effect on firm values.

We use data from enforcement actions initiated under the U.S. Foreign Corrupt Practices Act (FCPA) to examine the hypothesis that managers engage in foreign bribery because it is profitable. We find that bribery is associated with projects that have positive ex ante net present value. Even net of costs and penalties, the average ex post NPV for bribe-related projects is non-negative for firms that are caught, and the reputational loss is negligible. For a subset of firms that face comingled charges for financial fraud, however, the direct cost and reputational loss are larger and the ex post NPV is negative.

We document the frequent use of lockup agreements in seasoned equity offerings (SEOs), and examine the determinants of their use, duration, and early release. From 1996 through 2006, 93.8% of all SEOs included lockups, which is comparable to the 96.6% lockup rate for IPOs during the same period. The likelihood of an SEO lockup and its duration both are positively related to the degree of information asymmetry between insiders and outside investors. Lockups tend to be released early when share prices increase after the SEO. These results indicate that lockups help to guarantee the SEO’s quality by guarding against opportunistic selling by insiders, particularly when the opportunity for mispricing is large. That is, lockups represent a contracting solution to economize on the asymmetric information and agency problems that plague equity issues.

We propose and test an efficiency explanation for why firms deploy takeover defenses using initial public offering (IPO) firm data. We hypothesize that takeover defenses bond the firm’s commitments by reducing the likelihood that an outside takeover will change the firm’s operating strategy and impose costs on its business partners. Consistent with this hypothesis, we find that IPO firms deploy more takeover defenses when they have important business relationships to protect. An IPO firm’s use of takeover defenses is positively related to the longevity of its business relationships. IPO firms’ use of takeover defenses create positive spillovers for their large customers. And IPO firms’ valuation and subsequent operating performance are positively related to their use of takeover defenses when they have important business relationships.

An extensive accounting and finance literature examines the causes and effects of financial misreporting or misconduct based on samples drawn from four popular databases that identify restatements, securities class action lawsuits, and Securities and Exchange Commission (SEC) Accounting and Auditing Enforcement Releases (AAERs). We show, however, that the results from empirical tests can depend on which database is accessed. To examine the causes of such discrepancies, we compare the information in each database to a detailed sample of 1,243 case histories in which the SEC brought enforcement action for financial misrepresentation. These comparisons allow us to identify, measure, and estimate the economic importance of four characteristics of each database that affect inferences from empirical tests. First, these databases contain information on only the event that is used to proxy for misconduct (e.g., restatements), so they omit other relevant announcements that affect a researcher’s interpretation and use of the events. Second, the initial public revelation of financial misconduct occurs, on average, months before the initial coverage in these databases, leading to discrepancies in event study measures and pre/post comparison tests. Third, most of the events captured by these databases are unrelated to financial fraud, and efforts to cull out non-fraud events yield heterogeneous results. Fourth, the databases omit large numbers of events they were designed to capture. We show the extent to which each database is subject to these concerns and offer suggestions for researchers seeking to use these databases.

We find that evidence of a positive stock price reaction to the announcement of a name change is very weak and is sensitive to sample selection. We interpret the evidence as a caution against the popular opinion that corporate name changes have significant valuation effects. We also find little evidence that corporate name changes correspond to changes in a firm's stock return covariability with its industry index or changes in the firm's earnings growth rate. These results cast doubt on two purported motives for name changes: that they convey information to the market about changes in the firm's line of business or that they signal management's private information about the firm's future performance. Corporate name changes may serve useful purposes, but such purposes have small valuation effects or tend to be anticipated by investors.