Sunday, May 18, 2008

Symbols change; Companies stay the same...or do they?

Unfortunately, most companies that attempt to change their strategic directions fail. Nevertheless, there is no shortage of those that try. And why shouldn't they? Management are rewarded heavily when they take risks and are successful. On the other hand, golden parachutes prevent them from realizing an equal and opposite punishment for failure. The result? A management intent on risky new strategic directions!

This brings me to a topic which again poses a technical challenge for anyone trying to do historical analyses on stock performance: often, along with these changes in strategic direction, companies change their stock symbols! Fortunately, Compustat takes care of this problem...most of the time! By back-changing a company's symbol each time it makes a change, Compustat makes our life easier. For example, you won't find any reference to SUNW (Sun Microsystems' old symbol) in the database, only their brand new JAVA symbol!

This system does still have its flaws, however. For TimeWarner, who bought AOL, decided to go with the AOL symbol (quiz: so before the merger, does the symbol AOL represent TimeWarner or AOL?), and then decided to ditch the AOL moniker when they realized they overpaid for the transaction, how do you track these companies historically for analysis? Rather than track companies by symbol, use the GVKEY ID, which is unique for each company. And pray that management does not successfully lobby for the right to change their GVKEY each time they change strategic directions.

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