Marketing Sep 8, 2015

Com­pa­nies, Choose Your Name Wisely

The right name can sig­nal that you are a safe bet.

Yevgenia Nayberg

Based on the research of

Edward (Ned) Smith

Heewon Chae

Com­pa­nies like to stand out: to have the most inno­v­a­tive strat­e­gy, the fastest ser­vice, the cra­zi­est burg­er top­pings. But a com­pa­ny that strays too far from the cus­tom­ary way of doing things can scare away business.

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Despite the obvi­ous virtues of dif­fer­en­ti­at­ing one­self, being too dif­fer­ent can lead peo­ple to ignore you, not under­stand you — even penal­ize you if you’re so dif­fer­ent they can’t com­pre­hend how you’d be doing some­thing worth­while,” explains Ned Smith, an asso­ciate pro­fes­sor of man­age­ment and orga­ni­za­tions at the Kel­logg School.

How can com­pa­nies sig­nal to cus­tomers that they’re dif­fer­ent — but not too dif­fer­ent? Look­ing at the hedge-fund indus­try, Smith found an answer in a sim­ple sig­nal to cus­tomers: a company’s name.

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Funds that had atyp­i­cal strate­gies or port­fo­lios com­pared with oth­ers in their mar­ket cat­e­go­ry were more like­ly to have what Smith calls a delib­er­ate name” — one that delib­er­ate­ly sig­nals which cat­e­go­ry they belong to (think Sil­ver­stone Glob­al Macro Cap­i­tal” instead of Sil­ver­stone Cap­i­tal”). What’s more, a delib­er­ate name was an eco­nom­ic boon to those dif­fer­ent-from-the-crowd funds: con­trol­ling for per­for­mance, atyp­i­cal funds with delib­er­ate names grew more quick­ly than those with­out — and were more like­ly to make it through the recent finan­cial crisis.

What’s in a Name?

Doing pre­vi­ous work on hedge funds, Smith had noticed a strange nam­ing trend. Most funds had names that were strong-sound­ing but unin­for­ma­tive, not at all relat­ed to the fund’s strat­e­gy or offer­ings: Apex Part­ners, Black­wa­ter Cap­i­tal, Blue Ridge Advi­sors. (All the names men­tioned here are hypo­thet­i­cal exam­ples only.)

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But impor­tant­ly, some funds includ­ed the name of their cat­e­go­ry explic­it­ly: Apex Con­vert­ible Arbi­trage, for instance. (Every hedge fund belongs to one of about a dozen clear cat­e­gories, with which they self-iden­ti­fy when they start out.)

Smith won­dered whether this nam­ing choice had a pur­pose. I won­dered if it was strate­gic behav­ior,” he says. Are the funds that are real­ly dif­fer­en­ti­at­ing them­selves in respect to their behav­ior delib­er­ate­ly choos­ing names that make them look less dif­fer­ent?” It might be, he thought, that when funds strayed from the crowd in terms of their invest­ment strat­e­gy, they turned to a clear, accept­ed mar­ket label to give them­selves more legit­i­ma­cy. Invok­ing a cat­e­go­ry name might help atyp­i­cal firms avoid that poten­tial pun­ish­ment for being too different.

Some­thing as sim­ple as being able to sort of make sense of what a fund is doing based on its name might be enough to keep peo­ple invested.”

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Smith and his col­league, Hee­won Chae, looked at data from more than 12,000 hedge funds over 16 years, from 1994 to 2009. They exam­ined whether each fund was atyp­i­cal, com­par­ing each fund with the usu­al hold­ing and trad­ing behav­iors of all oth­er funds in its cat­e­go­ry: Which funds had names that men­tioned their mar­ket category?

About 30 per­cent of the funds had delib­er­ate names over­all. And sure enough, Smith and Chae found that funds one stan­dard devi­a­tion more atyp­i­cal than their cat­e­go­ry aver­age were 13 per­cent more like­ly to have delib­er­ate names.

Atyp­i­cal funds were more like­ly to include their cat­e­go­ry in their name if it was hard­er for investors to assess the funds’ qual­i­ty in oth­er ways, the researchers found. When these unusu­al funds did not have man­ag­er invest­ment (often tak­en as a sign of fund qual­i­ty, since, the think­ing goes, man­agers must have con­fi­dence in a fund to put up per­son­al cap­i­tal), they were some­what more like­ly to have delib­er­ate names. And when atyp­i­cal funds were domi­ciled off­shore — mean­ing less infor­ma­tion about them was read­i­ly avail­able — they had delib­er­ate names sig­nif­i­cant­ly more often.

That sug­gests that the firms may be think­ing of their names as a valu­able source of infor­ma­tion for investors, Smith says. Espe­cial­ly when rel­a­tive­ly lit­tle oth­er infor­ma­tion is avail­able, using your name as a clear sig­nal by explic­it­ly stat­ing the cat­e­go­ry might help atyp­i­cal funds con­vey to investors that they are legit­i­mate contenders.

Hedg­ing Their Bets

The nam­ing strat­e­gy seems to work. A delib­er­ate name was pos­i­tive­ly linked to an atyp­i­cal fund’s abil­i­ty to draw investors. When Smith and Chae focused on funds with­out delib­er­ate names, they found that atyp­i­cal funds grew more slow­ly than typ­i­cal funds — but there was lit­tle dif­fer­ence between typ­i­cal and atyp­i­cal funds with delib­er­ate names. Even after con­trol­ling for funds’ finan­cial per­for­mance — i.e., invest­ment returns — a fund that was more atyp­i­cal than its peers would grow sig­nif­i­cant­ly faster with a delib­er­ate name than with­out one, their mod­els of the data showed. By brand­ing itself with the legit­i­ma­cy of a cat­e­go­ry, it seemed, a fund could off­set the poten­tial prob­lems of an unusu­al approach.

The eco­nom­ic impact of a delib­er­ate name was espe­cial­ly stark dur­ing the recent finan­cial cri­sis of 2008 and 2009. The researchers found that atyp­i­cal funds were more like­ly than typ­i­cal ones to face cap­i­tal redemp­tions and thus liq­ui­date, but that hav­ing a delib­er­ate name mit­i­gat­ed this effect. Peo­ple were much more like­ly to take mon­ey out of atyp­i­cal funds ver­sus typ­i­cal funds, even con­trol­ling for the funds’ per­for­mance,” Smith says.”but this wasn’t true among atyp­i­cal funds with delib­er­ate names.”

Tak­en togeth­er, these find­ings hint at how peo­ple may make deci­sions about where to take their busi­ness, espe­cial­ly when things are tough. It could be that in times of uncer­tain­ty, peo­ple are look­ing for a way to make sense of their cur­rent sit­u­a­tion — and if they can’t, they want to with­draw,” Smith sug­gests. Some­thing as sim­ple as being able to sort of make sense of what a fund is doing based on its name might be enough to keep peo­ple invested.”

The researchers’ work sug­gests that even in oth­er indus­tries, firms that stand out might ben­e­fit from choos­ing a name that helps them fit in. Com­pa­nies want to be dif­fer­ent, but if they’re too dif­fer­ent, they risk con­fus­ing cus­tomers,” he says. This is a step they can take to off­set that difference.”

Featured Faculty

Edward (Ned) Smith

Associate Professor of Management & Organizations, Associate Professor of Sociology (Weinberg College, courtesy)

About the Writer

Valerie Ross is a science and technology writer based in New York, New York.

About the Research

Smith, Edward (Ned), and Heewon Chae. Forthcoming. “’We Do What We Must, and Call It by the Best Names’: Can Deliberate Names Mitigate the Consequences of Organizational Nonconformity?” Strategic Management Journal.

Read the original

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