Abstract

This paper documents a new phenomenon that stocks with similar names experience excessive return comovement. Using a sample of corporate name changes that are not related to changes in firms’ strategy, I show that excess comovement is present for the same companies in those months when their names are similar but not in the months when they are not. Time-series and cross-sectional tests show that excess comovement is predominantly present on days when stocks experience positive returns and high levels of trading. Moreover, the effect is more pronounced for stocks with higher limits of arbitrage, such as higher idiosyncratic volatility, higher short-sale constraints, and lower liquidity. These results are consistent with the non-fundamental based interpretation of excess comovement.  Finally, the similarities in names have implications for the cross-section of stock returns. In particular, I find spillovers in the high-volume effect documented by Gervais, Kaniel, and Mingelgrin (2001). All in all, this paper unveils an important behavioral anomaly: names similarities result in spillovers in the financial markets.