The impact of blockchain related name changes on corporate performance

https://doi.org/10.1016/j.jcorpfin.2020.101759Get rights and content

Highlights

  • Crypto-related name changes directly harm a company's short-term level of profitability.

  • We find larger and more persistent cumulative abnormal returns after the cryptocurrency-related name change announcements.

  • Crypto-exuberant pricing premiums are also found to persist for up to six months after announcements.

  • Blockchain-related name changes modified the traditional pathways of price discovery and information flow.

  • The results are robust over time and across multiple geographic regions.

Abstract

This paper examines the impact of blockchain and crypto-related name changes on corporate and financial performance of the corporations. We document several pieces of evidence suggesting that companies who partake in such “crypto-exuberant” naming practices become more volatile and offer substantial and persistent stock market premiums as a reward for their corporate identity change. However, the retroactive name changes harm firm's short-term profitability and have a dampening effect on financial leverage of the company. This paper advances the Dotcom effect literature by providing novel results on the changing traditional pathways of price discovery and information flows after the announcement of corporate name changes to blockchain-related names. The identified contagion channels display that crypto-exuberant companies become more susceptible to cryptocurrency markets, which should interest regulators and investors.

Introduction

Following a period of rapid FinTech adoption, and evidence of increasing popularity of this new technology among investors, many companies have announced the incorporation of blockhain and cryptocurrency-related terms to be included in their corporate name and branding. In this paper, we demonstrate that name-changing announcements generated diverse effects on the financial performance of the corporations which go beyond the ‘investor mania’ (Cooper et al., 2001) and ‘Dot.com’ effects reported in previous literature (Bosch and Hirschey, 1989; Karpoff and Rankine, 1994). There are several genuine reasons as to why investors and companies would be interested in blockchain and cryptocurrencies. The main problem, however, is that companies often have little or no intention to adopt cryptocurrency but are trying to take advantage of the popularity of this technology among investors.

A notable example is Eastman Kodak's announcement to enter the cryptocurrency market in January 2018. This announcement caused a sharp appreciation in Kodak's share price from $3.10 to $12.75 in less than 24 h after the announcement. According to Corbet et al. (2020a), this sharp increase in equity returns after the cryptocurrency announcement was not necessarily related to a revolutionary nature or superior characteristics of the proposed KodakCoin platform. This example postulated the emergence of a new type of information asymmetry that can cause a spillover effect from cryptocurrency markets to equity markets. After the announcement, Kodak returns became increasingly correlated with bitcoin, providing supportive evidence that equity returns absorbed some of the bubble-like characteristics of cryptocurrencies that have been unveiled by Cheah and Fry (2015), Corbet et al. (2018a), among others.

This paper utilises a sample of 82 companies that changed their names in the period from 30 December 2015 to 25 June 2019. Specifically, we contrast the effect of name changes in two groups of companies: (i) companies that change their names to incorporate blockhain or cryptocurrency-related naming; and (ii) companies that changed their names without any cryptocurrency or blockhain associations. The analysis proceeds in three stages. At the first stage of our analysis, we perform a panel regression model to test whether retroactive announcements affect the profitability and financial leverage of the firms. At the second stage, we test the investment mania hypothesis in a similar manner to Cooper et al. (2001) using a combination of traditional time-series models. As a robustness test, we consider the bitcoin-bubble period to analyse abnormal returns during the peak of bitcoin popularity. At the third stage, we analyse the channels of the information flows and price discovery following cryptocurrency-related announcements. The results display the substantial internal differentials between companies who utilise corporate crypto-exuberant name changes when compared to a group of non-blockchain or crypto-related corporate re-branding.

The paper contributes to the previous literature in two main ways. First, this paper contributes to the growing body of FinTech literature. Over the last decades, FinTech literature expanded significantly, shedding the light on a variety of risk-return characteristics of crypto-assets, such as cryptocurrency market bubble, volatility, liquidity, contagion effects and diversification benefits (e.g. Corbet et al., 2018b, Corbet et al., 2020b, Fry, 2018, Felix and von Eije, 2019), as well as issues associated with cybercriminality (Foley et al., 2019) and data quality (Alexander and Dakos, 2020). However, there is only limited evidence on stock price reactions to the corporate name changes driven by the intention to incorporate blockchain and cryptocurrency association (e.g., Akyildirim et al., 2020; Cahill et al., 2020). In most cases examined, we identified that no structural change has taken place apart from a change of corporate brand and image. Furthermore, no indications of any blockchain or cryptocurrency investment have been provided by those companies except their intention to do so. Akyildirim et al. (2020) analysed the potential misuse of the corporate blockhain announcements and called this effect ‘crypto-exuberance’.

While secondly, this paper contributes to the literature on corporate name changes and corporate re-identification (Karpoff and Rankine, 1994; Cooper et al., 2001; Wu, 2010), as well as information asymmetry debates (Alford and Jones, 1998; Boulton and Campbell, 2016; Bajo and Raimondo, 2017; Chen, 2019). Our results show that the effect of the crypto-related name changes alone produced substantial cumulative abnormal returns after the announcement day. We show that crypto-exuberance can be compared to the Dotcom bubble effect reported in early studies (Cooper et al., 2001), however, this is a new phenomenon and effects are broader. Specifically, we identify the contagion effect from cryptocurrency markets to the crypto-exuberant group of companies. Such direct financial impacts are particularly surprising, as in the majority of companies identified, there have been no structural changes in the company at the time of the announcement with the exception of the change in corporate identity. Our results show that crypto-exuberance is a new form of information asymmetry, beyond the investment mania documented by previous studies.

This paper reports several novel findings which are interesting for investors and financial regulators alike. With respect to business operations perspective, we find that crypto-related name changes directly harm the short-term profitability of the companies. Furthermore, these companies are also found to decrease their financial leverage in the following quarter after the announcement, which is not evident for non-blockchain nor non-crypto-related group. With regard to pricing dynamics, we find substantial evidence of high crypto-exuberant pricing premiums, acting as a reward for companies that utilise such questionable tactics.

For investors, our results offer evidence that the premiums are also found to persist for up to six months after the announcement. This demonstrates significantly stronger persistence in comparison to the Dotcom effect. However, due to the sharp increases in the volatility and higher extreme returns of share price performance, investors should be aware that crypto-exuberant companies become much riskier investment after the name change. These results can be explained by the fact that those companies are self-selecting when incorporating high-risk blockchain and cryptocurrency technology as a central theme of their perceived business image.

For financial regulators, our findings offer a novel insight on cross-asset relationships. We report that crypto-exuberant companies are found to have a decrease in dynamic correlations with the domestic exchange on which they trade, while simultaneously an increase in dynamic correlations with cryptocurrency markets. This result verifies the changing investor perceptions of such a decision to change corporate identity in this manner. This finding is also important for portfolio managers, who wish to increase portfolio returns attracted by blockhain and crypto-related name change announcements. It is important to note that only the key decision-makers within the company know for certain as to whether the new corporate association with blockchain and cryptocurrency will ever develop to generate technological developments. The use of such crypto-exuberant behaviour appears to have generated substantial information asymmetry and has shrouded the transparency of such corporations, necessitating immediate investigations into the true rationale behind the decisions to utilise such behaviours.

The rest of this paper is as follows. In Section 2, we briefly review the relevant information asymmetry and corporate identity literature to develop testable hypotheses. Section 3 presents a concise overview of the data used in this research, while Section 4 discusses the methodologies employed. Section 5 presents a concise overview of the results presented, while Section 6 concludes.

Section snippets

Literature review and hypotheses development

There are several ways that a name change of a company might have an impact on that company's financial variables, both on the book and in the market. Indeed, Green and Jame (2013) show that even the fluency of the company name has positive impact on both market and book variables (see also Corbet et al., 2020a).1

Data

We begin our analysis through the development of a concise list of announcements based on the intention to change the corporate identity of the company through changing name. Then we establish which of those companies partake in the ‘crypto-exuberant’ behaviour through the use of terms such as ‘blockhain’ or ‘cryptocurrency’ in their names. To develop such a dataset, we develop a number of strict rules in an attempt to standardise the process across major international financial markets.

The

Impact of name changes on firms' profitability and financing structure

In the first stage of our research, we test hypotheses H1 and H2 assuming that unlike regular name changes, crypto- and blockchain-related name changes signal that the company is about to enter a highly speculative business area. Therefore, profitability of the company might get hurt and its access to debt financing might get harder. To work on the above mentioned hypotheses, we use quarterly balance sheet and income statement data for the period between Q4 of 2017 and Q2 of 2019, adding up to

The impact of name changes on firms' profitability and access to debt financing

We report the estimated coefficients of Eq. (1) in Table 2 for the cases of NI and FL with respect to crypto related (upper panel) and non-crypto related (lower panel) name changes respectively. For each of the explained variables, we first regress separately on variables related to i) historical return patterns (M1 column), ii) liquidity and transaction costs (M2 column), and iii) prudence (M3 column). Finally, Mall column shows the results when all control variables are used as explanatory.

In

Conclusions

This research examined the relationship between corporate performance and the decision to change corporate identity in a crypto-exuberant manner, namely through the addition of words such as ‘blockchain‘and ‘cryptocurrency‘in the corporate name. This trend has become more frequent since 2017, and has been particularly concerning due to the large number of companies with no previous experience or association with indeed, any form of technological development prior to their decision to partake in

Acknowledgements

Authors are grateful for the comments provided by the participants of the conference on “Corporate Failures: Declines, Collapses and Scandals” (29th February 2020, Florida Atlantic University, Boca Raton, USA). Authors want to thank the guest editors Sofia Johan, Rebel Cole, and Denis Schweizer for their helpful comments. We are very grateful for the comments provided by two anonymous reviewers and the editor. Their help improved the paper significantly. Corresponding author also wants to thank

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