A Critique of the Assumptions Regarding Investor

The Empirical Economics Letters, 14(10): (October 2015) ISSN 1681 8997

A Critique of the Assumptions Regarding Investor Confusion of Similarly Identified Stocks Balázs Kovács Faculty of Business and Economics, University of Pécs H-7622 Pécs, Rákóczi Str. 80, Hungary Email: [email protected] Abstract: Former studies investigated whether investors confuse stocks with similar ticker symbols and company names. There exists long-term co-movement between similar stocks, but this phenomenon is not systematic. Case studies introduced in this paper help to understand what the relationship between stock similarity and confusion is. Investors may confuse stocks without similar names or tickers. Both lesser-known and well-known stocks may suffer from this phenomenon. News industry does not effectively prevent confusion. On the contrary, it may encourage it. Keywords: Stock Market Anomaly; Investor Confusion; Irrationality; Stock Similarity, Misinformation; Case Study JEL classification Number: G02, G14

1. Introduction Rashes (2001) presented a case of investor confusion among unrelated companies, but the ticker symbol of one of the companies was the commonly used name of the other. The well-known telecommunication company, MCI Communications was traded on NASDAQ under the symbol MCIC, while Mass mutual Corporate Investors, a closed-end mutual fund was traded on the NYSE under the symbol MCI. Rashes showed that the daily volume series of both companies had strong positive correlation with each other between 1994 and 1997. The correlation was even higher between the end of 1996 and 1997when MCI Communications engaged in merger negotiations. Rashes also showed that this comovement could not be attributed to other factors as the influence of the overall market or industrial relations. Davies et al. (2007) analyzed the long-term and systematic occurrence of investor confusion caused by ticker and name similarity on a larger set of British stocks. They found that only 7 pairs out of a total of 29 company pairs with similar tickers or names showed significant correlation in daily trading volume. In 5 out of these 7 cases, the correlation could be explained by market-wide influences of the FTSE 100 index. They concluded that mere similarity in tickers and names does not lead to systematic long-term abnormal profit opportunities in the smaller company’s return. Rashes (2001) thinks that there are three possible explanations to the confusion phenomenon. The first possibility is the “fat fingers” effect, i.e. investors mistype ticker symbols.

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Rashes concludes that this cannot be the main cause of the phenomenon because other typos as CIC, MIC and MCC are also valid symbols but these did not correlate with MCIC returns, volume or volatility. The second possibility is that investors process only a fraction of available information until they make their investment decisions. (E.g. they are familiar with both ticker symbols, but they read only the headlines containing the short name of the company (MCI).) This can cause a short term price movement, but after investors acquire more information, they should eliminate their mistaken positions. The third cause can be the fact that some investors do not know the ticker symbols and the underlying shares. Those investors are thinking that they trade MCIC but in fact they open a position in MCI. Rashes thinks that this could be the explanation for the long-term comovement he observed. Davies et al. (2007) agree with Rashes that fat finger effect could not lead to systematic confusion and that fractional information processing has only shortterm effects. However, they deny the long-term influence of unconsciousness of the correct symbol. 2. Research Questions Davies et al. (2007) showed that co-movement between similarly identified securities is not systematic or is only short-term. However, they did not consider all type of identity similarities. Both Rashes (2001) and Davies et al. (2007) assumed that only larger companies affect smaller ones in this way. Davies et al. (2007) criticized Rashes (2001), because he did not investigate if other news items than merger news could cause the same confusion. They also suggested that “the very publication of the paper [of Rashes] might have alerted investors to be more careful when executing their trades” (Davies et al., 2007, p. 695). Both Rashes (2001) and Davies et al. (2007) assumed that investors commit mistakes individually and information sources are correct. In the next section, we present several case studies to illustrate the correctness of the assumptions above. The following hypotheses are formulated: H1: The only dimensions of stock similarity are ticker symbols and company names. H2: Confused investors trade the stocks of the lesser-known company instead of the stocks of the well-known company. H3: Investor confusion between the same companies is restricted to a certain event type. H4: Publishing the case about the confusion between particular stocks prevents future confusions between the same stocks. We formulated also a hypothesis to suggest an answer to the question why do investors confuse certain similar stocks while do not others:


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H5: Highly recognized news sources may trigger massive confusion through publishing ambivalent or erroneous information. 3. Case Studies 3.1. GM Case General Motors Corp. (old GM) filed for bankruptcy on June 1, 2009. The company name was changed to Motors Liquidation Company. Old GM stocks were delisted from the NYSE and traded on the OTC market under the symbol GMGMQ thereafter. The assets of Motors Liquidation were going to be sold to General Motors Company (new GM) on July 10 as part of the company's reorganization plan. The stock price of GMGMQ increased by 43% on that day. The companies did not have similar names or tickers since new GM was not listed on any stock exchange. FINRA attributed the phenomenon to investor confusion.(de la Merced & Kouwe, 2009; FINRA, 2009; Fox, 2009) 3.2. Hi-Tech Case Hi-Tech Pharmacal [sic] produced prescription and over-the-counter drugs and nutritional products. The company was listed on NASDAQ under the ticker symbol HITK. Hi-Tech Pharmaceuticals [sic] is a manufacturer of healthcare products and nutritional supplements. FDA seized a large amount of the company’s products on Friday, February 24, 2006. On Monday, the stock price of HITK fell by 8.25% in about ten minutes. Bloomberg mistakenly assigned the symbol HITK to the news item about the seizure, but it removed the story from its headlines and released a correction in the afternoon. Hi-Tech Pharmaceuticals was a privately held company, so, from the traders’ point of view, Hi-Tech Pharmacal was the better known company.(FDA, 2006; Hi-Tech Pharmaceuticals, Inc., 2010; Morris, 2006) However, Morris published the case of confusion in 2006(Morris, 2006),on November 18, 2013, an analytics website named Option Cast posted a message on Stock Twits and Twitter about a similar seizure as mentioned before, but the website mixed up the two Hi-Tech. (Option Cast, 2013) The volume of nearly 620,000 shares was quite outstanding. 3.3. Nest Case Nest Labs is engaged in the development of intelligent thermostat systems. Among others, Al Gore's Generation Investment Management invested in the privately-held company in 2012 and Google Ventures in 2013. (Google Inc., 2014; Thomson Reuters, 2014)Nestor manufactured traffic enforcement systems to the government until 2009, when it ceased operations. After that, Nestor shares traded on the OTC market under the ticker symbol NEST. (Thomson Reuters, 2014)Stock price closed 8,438.46% higher on October 18, when Al Gore mentioned in an interview that "Nest" is a company whose technology is


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worth buying and in which himself was an investor. (Gadzhev, 2013; Korn, 2013) The price movement was associated with a daily volume of more than 12 million shares. Gadzhev published the case of confusion in 2013 (Gadzhev, 2013), yet the confusion repeated in 2014. Google announced the acquisition of Nest Labs on January 13, 2014. The stock price closed 1,900% higher on January 14. The volume of 2.25 million shares was quite outstanding compared to the previous day's turnover of a few thousand shares. (Russolillo, 2014) 3.4. Petrobas Case Petroleo Brasileiro SA Petrobras, an oil company, is the largest company in Brazil and has several subsidiaries worldwide. Its shares are traded on the NYSE under the ticker symbol PBR.The name of the Argentinian subsidiary was Petrobras Energia Participaciones SA, and its shares were also traded on the NYSE under the ticker symbol PZE. (Thomson Reuters, 2014)On a live broadcast on CNBC on December 28, 2007, Kenneth Heebner portfolio manager was asked for investment advice, who mentioned Petrobras, with the Brazilian parent company in mind, but CNBC showed the ticker and stock chart of Petrobras Energia (PZE) instead. (CNBC, 2007). The stock price of PZE increased by 27.5% that day. The daily (split adjusted) volume of the previous days were below 500,000, but it exceeded 2.6 million that day. The daily volume remained above one million for two weeks despite the fact that CNBC acknowledged the mistake. On Monday January 7, 2008, CNBC made an interview with Heebner again, who recommended Petrobras again, and CNBC showed the PZE chart during the interview again. The next day, the stock price of PZE reached $17, and the volume was 3,164,800 shares. (CNBC, 2007; Salmon, 2008) 3.5. TMCS Case Ticketmaster Online – Citi Search provided online search opportunities for different urban tourist destinations and online purchase of tickets for various events. Temco Service Industries provides facility support services for companies and public institutions in the US and Europe. The company's shares trade under the ticker symbol TMCO on the OTC market from October 7, 1998, before that date its ticker was TMCS. (FINRA, 1998)On December 3, 1998, Ticketmaster-Citi Search completed its IPO on NASDAQ under the symbol TMCS. The TMCO stock price rose by 126%, while the volume increased by 1,971%. Some Reuters and Business Wire news items on Ticketmaster IPO were accidentally published on Temco's Yahoo Finance page. (Lee, 1998). 4.

Results and Discussion

To reject the first four hypotheses, it is sufficient to present one contradicting case to each. To accept the fifth, it is sufficient to present one supporting case. Table 1 shows whether a


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case supports a hypothesis. In lack of sufficient information, this can not be always determined. Table 1: Main Attributes of the Cases and Their Support to the Hypotheses Case Gm Hi-tech Nest

Petrobras

Tmcs

Similarity Subject to Cause of condimensions confusion fusion (year) Identity ? Reorganization (2009) Name and WellSeizure identity known (2006, 2013) Name and LesserInvestment ticker known advice (2013), symbol acquisition (2014) Name and LesserInvestment identity known advice (2007, 2008) Ticker LesserIpo (1998) symbol known

Confusion Origin of revealed in mistake 2009 ?

H1 H2 H3 H4 H5 – ?

?

? ?

2006

Bloomberg ? –

+

– +

2013

?

+ +

–

– ?

2007

CNBC

? +

+

– +

1998

Yahoo finance

+ +

?

? +

Note: –: contradicts; +: supports; ?: can not be determined

H1 hypothesis is rejected, because as GM case shows, neither ticker symbols nor company names were similar to each other, yet investors confused the companies. Company identity is also an important dimension regarding stock similarity. H2 hypothesis is rejected, because as Hi-Tech case shows, information related to a lesser-known company could result in mistaken trades with the stocks of the well-known company. H3 hypothesis is rejected, because as Nest case shows, confusion between the same companies is not necessarily event-specific. H4 hypothesis is rejected, because as Hi-Tech, Petrobras and TMCS cases show, publishing the confusion does not necessarily prevent future confusions, even if the circumstances are very similar. H5 hypothesis is accepted, because as in the Hi-Tech, Nest and Petrobras cases, news agencies published erroneous information which led to stock confusion. 5.

Conclusion

Rashes (2001) presented a case of long-term co-movement between similarly identified securities. Davies et al. (2007) showed that this type of co-movement is not systematic. They acknowledge the existence of short-term confusion, but they left open the question


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“why some similarly identified securities experience investor confusion while others do not” (Davies et al., 2007, p. 710). My findings are useful for designing event study analysis to understand the phenomenon in more depth. There are three major dimensions of similarity regarding stock confusion: ticker symbols, company names, company identity. Investors may also trade the stocks of the well-known company instead of the lesserknown one. Confusion between the same companies is not restricted to a certain event type. Confusion can repeat itself even if it was previously reported. Mistaken trades are not always independent if they rely on the same incorrect news sources. Acknowledgements I would like to thank Gábor Pauler, Ferenc Kruzslicz and Bálint Kovács for proof reading the article and providing me with useful suggestions. References CNBC, 2007, Focusing on Return$. Friday, 28 Dec 2007 | 3:45 PM ET; http://video.cnbc.com/gallery/?video=616701397 (August 3, 2014) Davies, J.R., Hillier, D. & Thamm, J., 2007, Investor confusion and similarly identified securities. Accounting &Finance, 47(4):693-711. de la Merced, M.J. & Kouwe, Z., 2009, A Stock With Bounce: Investors Stick to G.M. The New York Times, July 10, 2009; http://www.nytimes.com/2009/07/11/business/11shares.html?_r=1& (June 17, 2015) FDA, 2006, FDA Requests Seizure of More Dietary Supplements Containing Ephedrine Alkaloids. February 24, 2006; http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/2006/ucm108606.htm (June 17, 2015) FINRA, 1998, Daily List: OTCBB and Other-OTC System Changes - 10/6/1998 12:00:00 AM. OTC Bulletin Board; http://www.otcbb.com/asp/dailylist_detail.asp?mkt_ctg=ALL&d=10/06/1998 (July 22, 2014) FINRA, 2009, Investingin a Bankrupt Company: A High Risk Venture. 7/14/2009; http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/TradingSecurities/P119359 (June 17, 2015)


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Fox, E., 2009, General Motors Stock Information. eHow, 09/29/2009 16:33:07; http://www.ehow.com/about_5476662_general-motors-stock-information.html (June 17, 2015) Gadzhev, K.,2013, Nestor, Inc. (OTCMKTS:NEST) Crashes. Was a Misunderstanding. HotStocked.com, October 22, 2013; http://www.hotstocked.com/article/67052/nestor-incotcmkts-nest-crashes-was-a.html (June 17, 2015) Google Inc., 2014, Google to Acquire Nest. January 13, 2014; http://investor.google.com/releases/2014/0113.html (June 17, 2015) Hi-Tech Pharmaceuticals Inc., 2010, About Hi-Tech Pharmaceuticals, http://www.hitechpharma.com/aboutus/default.htm (June 17, 2015)

Inc.;

Korn, M., 2013, Al Gore Makes Smart Tech Investments, Here’s His Next One. The Daily Ticker, October 19, 2013 7:09 PM; http://finance.yahoo.com/blogs/daily-ticker/al-goremakes-smart-investments-next-one-160652374.html (June 17, 2015) Lee, C., 1998, Ticketmaster Online Shares Soar As Net-Stock Demand Stays Strong. The Wall Street Journal; http://online.wsj.com/news/articles/SB912708402237303500 (June 17, 2015) Morris, K., 2006, Amityville, N.J., drug maker suffers from confusion with similarly named firm. Newsday, 03/01/2006; http://search.ebscohost.com/login.aspx?direct=true&db=n5h&AN=2W61289388659&lan g=hu&site=ehost-live (June 17, 2015) OptionCast, 2013, $HITK company that is being bought...Stock Twits, Nov. 18 at 4:43 PM; http://stocktwits.com/OptionCast/message/17468973 (June 17, 2015) Rashes, M.S., 2001,Massively Confused Investors Making Conspicuously Ignorant Choices (MCI–MCIC). The Journal of Finance, 56(5):1911-1927. Russolillo, S., 2014, Nestor: The New Tweeter. MoneyBeat, 5:21 pm ET Jan 15, 2014; http://blogs.wsj.com/moneybeat/2014/01/15/nestor-the-new-tweeter/ (June 17, 2015) Salmon, F., 2008, The CNBC-PZE Fiasco. Upstart Business Journal, January 10, 2008, 12:00am EST; http://upstart.bizjournals.com/views/blogs/market-movers/2008/01/10/thecnbc-pze-fiasco.html?page=all (June 17, 2015) Thomson Reuters, 2014, Eikon. Desktop software.