Eponymous Entrepreneurs⇤

Eponymous Entrepreneurs⇤ Sharon Belenzon† Aaron K. Chatterji‡ Brendan Daley§ Fuqua School of Business Duke University November 11, 2014 Abstract We demonstrate that firm eponymy—the familiar convention of firms being named after their owners—is linked to superior performance. We propose a novel explanation, referred to as “utility amplification,” and develop a corresponding signaling model. The model generates three main empirical predictions: (1) The incidence of eponymy will be low; (2) Eponymous firms will outperform other firms; (3) These e↵ects will be intensified when the entrepreneur’s name is rare. Using unique data on over 485,000 firms from Europe and the United States, we find support for all of these predictions. Several extensions and robustness checks are considered. Keywords: Entrepreneurship, Signaling, Firm Names ⇤The authors thank seminar participants at Harvard, MIT, Stanford, Northwestern, NBER, UCLA, and UVA for their useful comments and suggestions. †[email protected] ‡[email protected] §[email protected] 1 Introduction Many firms are eponymously named; that is, they bear the name(s) of their founding owner(s). Leveraging a unique dataset, this paper demonstrates that eponymy is linked to superior firm performance. For instance, controlling for other characteristics, eponymous ventures generate, on average, a 3.2 percentage-point higher return on assets (ROA), which is approximately one-third the magnitude of the sample mean ROA. Further, and perhaps counterintuitively, we propose that non-pecuniary considerations may be a large driver of the eponymy-performance relationship. Succinctly put, we propose that eponymy creates a stronger association between the entrepreneur and her firm that amplifies the utility or disutility of favorable or unfavorable market outcomes, respectively. We refer to this phenomenon as “utility amplification,” and intend it to capture any non- pecuniary benefits (or costs) to the entrepreneur of having a favorable (or unfavorable) impression of her firm tied more closely to herself.1 Consequently, high-ability entrepreneurs are more drawn to eponymy than are low-ability ones. While we believe this explanation to be novel, it clearly fits in a recent literature arguing that non-pecuniary considerations likely play a significant role in entrepreneurship. Hamilton (2000) and Moskowitz and Vissing-Jørgensen (2002) propose that there are likely substantial non-pecuniary benefits to entrepreneurship, given the large wage di↵erential between self- employment and paid employment and that returns to private equity (where entrepreneurs typically invest their private holdings in a single company) are no greater than public equity. Further, Pugsley and Hurst (2012) report survey evidence that non-pecuniary motivations are major drivers in entrepreneurial decision-making and could account for why the majority of small businesses do not grow. In a similar vein as our results, they find that entrepreneurs who report non-pecuniary motives have slightly higher survival rates than those who report pecuniary motivations. To formalize this explanation, we introduce a model, characterize its equilibrium, and derive its testable implications. We then demonstrate that the evidence is consistent with the predictions of the theory, using novel data on over 420,000 companies and 5.5 million individuals from Europe and a smaller dataset of over 60,000 firms from the United States. Eponymous Firms Selecting the name of their firm is an important and highly visible choice all new-business owners must make. As a Wall Street Journal article memorably stated, “For entrepreneurs, 1While our primary interpretation is that these benefits/costs are non-pecuniary, more generally they could be any benefits/costs distinct from firm-performance measures. For example, future business or employment opportunities for the entrepreneur may be influenced by this impression (see Section 2). 1 the importance of picking the right name for a company may rank second only to naming a child. (And it’s a lot more expensive to change.)”2 Not only is there a proliferation of practitioner guides for choosing a business name, an entire industry of naming consultants exists solely for this purpose. Interestingly, one point of seeming consensus among them is that naming the firm after the owner is not advisable because doing so indicates a lack of creativity and reduces resale value.3 Nevertheless, eponymy is certainly a familiar naming strategy. Well-known examples in- clude Dow Chemical, Gucci, Guinness, Hewlett Packard, Hess, Johnson & Johnson, Kroger, Porsche, Proctor & Gamble, Ryanair, Walgreens, and many others. In our dataset, approximately 13% of firms bear the name of their majority owner. Although not all entrepreneurs think carefully about the name of the firm (Hewlett and Packard reportedly flipped a coin to see whose name would come first4), other naming stories indicate that names, particularly eponymous names, matter. Marvin Bower of McKinsey & Company explicitly chose not to put his own name on the firm after the death of Mr. McKinsey. He noted, “I didn’t want anybody dictating to me how I was going to spend my time. So I had no interest in calling it Bower & Co., or even McKinsey-Bower. I wanted my freedom.”5 To our knowledge, previous academic research has not addressed this well-known naming strategy. Eponymy, Utility Amplification, and Firm Performance Our model builds on a traditional signaling framework with some important variations. The entrepreneur can engage in activities, eponymy being the prime example, that a↵ect the degree to which the firm is associated with the entrepreneur herself. Our key, novel assumption is that higher levels of signaling activity (i.e., a stronger association between the firm and the entrepreneur herself) are not directly costly, but instead “amplify” the utility or disutility of the favorable or unfavorable market outcomes, respectively. In Section 2 we further discuss the interpretation of this assumption as well as its support in the prior literature. Intuitively, this amplification e↵ect makes eponymy a more attractive strategy for high-ability entrepreneurs, who expect better market outcomes, than for low-ability ones. We demonstrate that our model has a unique stable equilibrium, and that it is partial 2Bounds, Wendy. “How to Choose a Company Name: A 12-Point Test,” Wall Street Journal, June 5, 2008 (http://blogs.wsj.com/independentstreet/2008/06/05/how-to-choose-a-company-name-a-12-point-test). 3For example, please see http://www.businessnamingbasics.com/namedevelopment/naming-business- oneself-easy/ (last accessed November 11, 2014). 4Burrows, Peter. “Hewlett & Packard: Architects of the Info Age,” BusinessWeek, March 28, 2004 (http://www.businessweek.com/stories/2004-03-28/hewlett-and-packard-architects-of-the-info-age) 5Huey, John. “How McKinsey Does It,” Fortune, November 1, 1993. 2 pooling when high-ability entrepreneurs are relatively rare (as appears to be the case in our data). In terms of eponymy, high-ability entrepreneurs engage in it, while low-ability ones mix between doing so and not. In equilibrium, low types trade o↵the boost in perception that eponymy (i.e., pooling with high types) brings, with the amplified disutility in the (likely) event of unfavorable market outcomes. The model then makes three main empirical predictions: (1) The incidence of eponymy will be low; (2) Eponymous firms will perform better than other firms; and (3) These e↵ects will be intensified when the entrepreneur’s name is rare. We believe (3) to be a particularly discriminating test of our model: for entrepreneurs with rarer names, the link between eponymy and performance will be stronger, but they will be less likely to engage in eponymy. While other ex-ante plausible explanations for a link between eponymy and performance exist, explaining this potentially counterintuitive pattern is a more difficult task. We find empirical support for all three predictions. First, we confirm that eponymy is indeed rare in our large sample of public and private firms across several nations. Sec- ond, we empirically document an association between eponymy and higher profitability and higher returns on assets. Third, we find the relationship between eponymy and performance is strongest in rare names (e↵ectively disappearing in common names), but also that the incidence of eponymy is lowest with rare names, exactly as our signaling model predicts. Furthermore, we conduct several additional analyses designed to reveal whether the mechanism we propose is plausible. First, since our argument is based on eponymy signaling privately known ability, it is encouraging that we find our empirical results to be strongest for young firms, of which likely little is known. Second, our theory predicts that the eponymy-performance relationship should be strongest in industries with greater performance dispersion and in industries where market information more accurately reflects the entrepreneur’s skills, both of which we find empirical support for. Finally, we check the sensitivity of our main results with numerous robustness checks, including accounting for di↵erences in ownership structure, name switching, ownership changes, serial entrepreneurs, and the ethnic background of business owners. Broader Implications for the Study of Entrepreneurship Beyond the specifics of our findings, this work may have broader implications for the study of entrepreneurship. New and small firms are often closely held and rely primarily on the contributions of their founders.

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