What's in a name?
An eponymous firm is one whose name bears that of its founder. A number of eponymous firms have developed strong global brands and franchises, including: Ford Motor Company, Hewlett & Packard, Kroger, Ralph Lauren, Salvatore Ferragamo, Michael Kors, Johnson & Johnson and Ryanair.
In a research paper published in the American Economic Review, entitled Eponymous Entrepreneurs, Sharon Belenzon, Aaron Chatterji and Brendan Daley from Duke University show that eponymous firms do better than other firms, and attribute this finding to a signalling effect; higher ability entrepreneurs are more likely to run eponymous firms thanks to the reputational benefits of a successful venture. Conversely, a low ability founder is less likely to attach his name to his firm due to the costs associated with managing reputation risk in the event his company fails.
To illustrate, Aubrey McClendon, co-founder of non-eponymous firm Chesapeake Energy, has said that given the anxieties that the firm might fail, it was decided not to attach the names of the founders to the firm name because 'we thought it would be easier to live with that if our names weren't on the failed enterprise.' Thus, better quality entrepreneurs are more drawn to eponymy than low ability ones. Also, eponymous firms tend to encourage more effort from the founder who bears their name.
The sample used was over 1.8 million European firms, with over half located in Spain, France or Great Britain, including publicly listed and private firms. Eponymous firms represent 20% of the sample, and their average size is similar to non-eponymous firms. The key finding is that eponymous firms are more profitable than non-eponymous firms; they generate an average return on assets (ROA) of 7.8% relative to 4.8%.
The authors also show that the signalling effect is more powerful for eponymous firms run by founders with a rare name. The incidence of eponymy is lower for founders with rare names but the performance of these eponymous firms is greater. Founders with rarer names expect to incur more damage to their own brand if their eponymous firm fails. That is, they have a particularly high conviction that their eponymous firm will succeed.
The authors extend their results to a sample of 60,000 firms in the United States and show there too, eponymous firms are more profitable than their non-eponymous counterparts.
Could the finding of a strong positive link between eponymy and firm performance - now that it is widely disseminated - lead to an influx of eponymous firms and a subsequent deterioration in their performance, as founders seek to exploit this pattern? Unlikely, as new entrepreneurs still need to carefully consider the fall-out associated with managing their damaged brand if their eponymous firm fails.