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A firm that shares a name with its founder earns higher profits

A GOOD business name can be pricey. An entrepreneur looking for the perfect one can hire a naming agency to offer ideas, but that can cost tens of thousands of dollars. That may explain why many founders follow the example set by the American President and name their businesses after themselves. A recent article* by academics from the Fuqua School of Business at Duke University in North Carolina suggests that doing so does not just save money—it can also boost profits.

The study looked at small businesses in western Europe. It relied on a sample of almost 2m firms, data for which are contained in a commercial database called Amadeus. The database includes information about owners, managers and financial performance from 2002 to 2012. Firms in the sample tended to be, on average, fairly young, with few shareholders and employees. Checking against the surnames of the largest shareholders, the authors found that 19% of firms were named after their founders.

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After accounting for other factors, firms that had their largest shareholder’s name enjoyed a three percentage-point higher return on assets (ROA). (This was not true of firms using a surname other than that of the largest shareholder.)

The authors explain this finding by noting that if you name a firm after yourself, you are sending a signal. You believe your product is good enough to stake your personal reputation on it, not just that of your company. If you fail, you will remain personally connected to that failure for the rest of your career. The authors suggest that customers receive this signal, and reward namesake companies accordingly.

This hypothesis was tested by comparing different types of names. The authors note that eponymous entrepreneurs with a common name will be less closely identified with their firms. So the signal is weaker. The data show that the ROA premium is indeed lower for firms named after founders with common names. The ROA premium also diminished over time. The authors explained this by noting that, as consumers learn about the actual quality of firms, they rely less on signals such as names.

Eyeing the advantages, might not substandard entrepreneurs cheat by naming their firms after themselves? They could, but the short-term benefits of cheating must be weighed against the long-term reputational damage of being found out. It is easier to choose a different name when starting a firm than to change your own name if it fails.

Source: economist
A firm that shares a name with its founder earns higher profits

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