The share market effects of naming companies after blockchain

This past week in my ECONS101 class, we discussed financial markets. In particular, we discussed the efficient markets hypothesis - the idea that all publicly available information (good and bad) about an asset's future cash flows is already captured in the asset's price (in the strongest form of the efficient markets hypothesis, all private information is also captured in the asset's price). So, it was timely that the Economics Discussion Group discussed this article by Archana Jain (Rochester Institute of Technology) and Chinmay Jain (Ontario Tech University), published in the journal Economics Letters (sorry, I don't see an ungated version). The authors look at the impacts on the share price when a company adds changes its name to include "bitcoin" or "blockchain".

I'd already followed the news about one of these companies in late 2017 - Long Blockchain Corp, formerly Long Island Iced Tea - which has been in the news again recently. Jain and Jain looked at ten such companies, and compared their performance with the performance of other companies that are included in blockchain exchange-traded funds. If there was something important going on with blockchain, you'd expect it to be picked up in the share prices of these other companies as well. Instead, they found that:

...the firms that change their name to include blockchain in it had a negative return of 13.55% from day −14 to day −2. We see an increase in the return of these firms from day 0 to 1 at 34.29%. Over the five-day period from day −2 to day +2, all firms earn a strongly statistically significant abnormal return of 100.89 percent. Over a 30-day (60-day) period from +1 to +30 (+60), all firms earn a 81.47% (72.84%) percent return. However, over a 60-day period from +61 to +120, all firms earn a −56.32 percent return.

In other words, the companies that changed name were not doing well (in terms of share price) in the lead up to their name change. They then saw a massive increase in their share price, up to 30 days after changing name, presumably as investors looking to jump on the cryptocurrency bandwagon bought into the companies. Then the share price started falling back to its original level. In the meantime, it's likely that the original company owners cashed out a big payday, while the stupid investors who failed the due diligence test were left licking their wounds.

Jain and Jain's article is a brief "how-to" guide for making money from a vapourware holding company. Just add the latest buzzword to your company name, and cash out big (but make sure to do so before the SEC figures it out). It's also proof that the efficient markets hypothesis doesn't hold in the short run. Otherwise, investors wouldn't get suckered into this.