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Study claims investors prefer stocks that appear earlier in the alphabet

Andrew Burton/Getty Images

Want to boost your company's stock price? Consider changing your name to something at the start of the alphabet.

New research from Jesse Itzkowitz, Jennifer Itzkowitz, and Scott Rothbort says you'll increase your valuation. After studying all stocks traded on the three major exchanges, they find that since 1998 stocks with earlier names in the alphabet do better. They are traded 1.7 percent more frequently than later-in-the-alphabet stocks, and they have a price-to-book value that's 6.1 percent higher. Not surprisingly, this bias seems concentrated among individual investors — amateurs — rather than institutional investors who are a bit more careful.

In other news, Vox Media is going to be changing its name to Aardvark Media in advance of our IPO.

What they found

The price-to-book ratio is one of several common methods for assessing stock valuations. As part of any company's accounting process, it needs to list what assets its owns and what those assets are worth. Add all those assets — real estate, equipment, copyrights, brand value — together and you get the "book" value of the company. Add up the price of all the company's shares of stock, and you get the market price of the company.

Normally a company's price-to-book ratio will be above one (if it weren't, you could buy the whole company and sell it off for parts) and how far above one it is constitutes a sign of how optimistic financial markets are about the company and its management team. The researchers found, essentially, that stocks are more aggressively priced when they are early in the alphabet.

They think this is a consequence of individual investors scanning stock listings and then settling for "good enough" companies to buy. This exaggerates the price of companies that are early in the alphabet, since people get to them sooner. They think the reason this phenomenon starts in 1998 is that online brokerages made it easier for not-so-attentive small timers to trade stocks.

Are there any weaknesses in the study?

As previously covered on Vox, most published findings in financial economics are false and this could be too. If you run enough data through a computer, you'll find some statistically significant relationships just by random chance. Apple has a high price:book ratio and Yahoo a low one for reasons that have nothing to do with alphabetical bias. The theory that the effect is present since 1998 but not before because of online trading is plausible but, again, could just be coincidence.

By the same token, while price:book ratios are an important means of assessing stock valuations they're hardly the only means. If alphabetical bias was shown to exist across a wider range of valuation metrics, the causal theory would be more persuasive.

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