Companies are looking for ways to change their public image as concerns about climate change and sustainability grow. A study by Carmelo Latino of the Leibniz Institute for Financial Research SAFE sheds light on the financial impact of corporate name changes. His study is based on a textual analysis of the business description sections of Form 10-K, the standard annual report filed by companies with the U.S. Securities and Exchange Commission (SEC) after the name change. It demonstrates that many of these name changes can be interpreted as a novel form of greenwashing, wherein companies strategically alter their image to project eco-friendly and sustainable impressions.
SAFE researcher Latino analyzes whether the adoption of green names influences investor behavior. His findings reveal a significant positive stock market price reaction to the announcement of corporate name changes to green-related names, particularly if the respective company was not involved in green activities at the time of the announcement. “Companies that add ‘green’ words to their names experience significant cumulative abnormal returns of about 15 percent during the one-day period following the announcement.”
However, only companies that have not been previously involved in any sustainability-related activities see this positive effect, highlighting the signaling role of green names in communicating a new commitment to environmental issues.
Companies that fail to align their operations with their new name over an extended period face significant negative abnormal returns, indicating a loss of shareholder confidence in the company’s true commitment to sustainability, the study finds. Loriana Pelizzon, Director of the Financial Markets Research Department and member of the Management Board at SAFE adds: “The results of the study suggest that greenwashing has a non-permanent positive effect on stock prices. However, this effect disappears as soon as the greenwashing is discovered by the investors.”
Latino highlights that greenwashing may generate short-term profits but ultimately destroys a company’s trust and credibility According to the findings, investors should be cautious about investing in companies that announce green-name changes, especially if they do not already have a track record of sustainability activities.
The study uses a sample of 95 U.S. companies that have announced the addition of a green-related term to their corporate name between January 2000 to December 2022.
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Carmelo Latino
