Do family business names affect their financial performance?

A man smiles as he looks at the new name of his family's company

Does a company’s name really matter? If it does, is it better to have a differentiated name or one that conforms to the usual patterns? In Barcelona School of Economics Working Paper 1408, “Organizational Identity and Performance: An inquiry into Nonconforming Company Names,” researchers Mario Daniele Amore, Mircea Epure and Orsola Garofalo use data on Italian family firms to answer these questions and find that, on average, family firms that break with conformity tend to have greater financial performance.


Why do company names matter?

Economists have studied the role of company names because they are a key attribute used by consumers to identify and differentiate firms. Entrepreneurs and managers choose names to shape the perceptions of stakeholders towards their firm. For example, in the late 1990s, entrepreneurs often added the suffix “.com” to differentiate from traditional businesses in their sector and to associate with the booming Internet industry.

Previous research has suggested that company names that align with prevailing social norms increase legitimacy. In the case of family firms, eponymy – the practice of naming the firm after the family – has received much attention. Eponymy is believed to be associated with greater performance due to being a credible signal of commitment of owners’ personal reputation. 

The authors focus on the trade-offs between benefits and costs of nonconforming company names, a previously unexplored question. Nonconforming company names are made up of foreign-sounding words unrelated to the owners’ surname. This is especially relevant for family firms, which tend to shape their competitive advantage around a local identity. On the one hand, nonconforming names may come at the expense of lower local familiarity and social embeddedness. On the other hand, such names may open doors in other markets and to nonlocal stakeholders due to differentiation.

What does theory tell us?

Researchers have long pointed out that “being different” can improve firm performance. Nonetheless, breaking the mold comes with costs. Choosing an unconventional name for a family firm means foregoing the benefits of familiarity, such as higher confidence from local consumers and business partners. The fact that we observe family firms with nonconforming names suggests that there must also be some benefits, such as benefits from differentiation. Given the nature of these trade-offs, the authors hypothesize that the benefits of non-conformity can outweigh their costs.

However, if this hypothesis is true, why is it that not all firms choose nonconforming names? This question leads the authors to their second hypothesis: the benefits of nonconforming names decrease (a) as the number of firms with unconventional names increases, or (b) if the competitive space requires less differentiation (i.e., if the firm is larger than peers or operates in a less crowded product space).

What does the data say?

The authors use data on 2,625 unique family firms from Italy spanning 14 years. Overall, around 14% of firms are found to have nonconforming names. In comparison, there are about 30% eponymous firms in the sample. Nonconforming names tend to have English (foreign) words and be slightly shorter than conforming names. Moreover, the prevalence of nonconforming names appears to have increased slightly over the period between 2000 and 2014.

Firms with nonconforming names also tend to have fewer family members on the board of directors, higher R&D spending and a higher fraction of business-to-business (B2B) transactions than firms with conforming names. 

The authors run a set of regressions to study the effect of non-conformity on return on assets (ROA), controlling for several potential confounding variables such as:

  • Firm size
  • Age of the firm
  • Liquidity
  • Debt 
  • Family involvement in governance
  • Differences across years, regions and industries

The results point to a robust relationship between nonconforming family names and return on assets: having a nonconforming name is associated with higher ROA by about one percentage point (from an average of 9%). Additional estimations using instrumental variables and matched samples further validate that the benefits of nonconforming names outweigh their costs.

To validate the second hypothesis, the authors extend their analysis by examining the nexus between having a nonconforming name and the share of peer firms – firms in the same market – with nonconforming names. 

The results show that having more peers with nonconforming firm names, as well as a lower share of eponymous firms, reduces the observed benefit for firms with nonconforming names. Similar results are obtained when the nonconforming firm is larger than peers or acts in a less crowded product class. 

In other words, the second hypothesis is validated: benefits of nonconforming names decrease (a) with the number of firms with nonconforming names, or (b) when the firm is in a lesser need of differentiation.

Conclusions 

Firm names matter. The authors show that nonconforming names in the context of family firms are associated with better financial performance.

Their results show that nonconforming names carry a potential premium along with potential costs. Furthermore, they show that benefits of nonconformity decrease with the number of nonconforming peers, when the firm is larger than peers or it acts in a less crowded product class, all instances in which the value of the differentiation signal is diluted. 

The authors conclude that nonconforming company naming is most beneficial when rival firms’ adoption of nonconforming names is lower and eponymy is higher, and in general when the firm is otherwise less visible in its competitive space.