Internet Stocks: Value-Drivers, Market Irrationality, and Mispricing an Overview of the Emerging Empirical Research Evidence

Abstract

This monograph provides an overview of the emerging empirical research evidence on Internet stocks. It is primarily intended to serve an informational and educational purpose - as a primer for researchers, investment analysts and managers, financial and technology sector executives, investors, writers, educators, students, policy-makers, etc. It also includes an extensive bibliography of papers, articles, books, and other documents that provide additional details on the issues covered. The monograph covers the following: An overview of perspectives on the valuation of Internet stocks, with particular reference to two valuation approaches that attempt to incorporate the unique characteristics of the Internet industry: (i) adapted discounted cash flow (DCF) models and (ii) real options models. The empirical research evidence on the value-relevance, for Internet stocks, of nonfinancial variables (measures of website traffic and related factors such as strategic alliances, firm visibility, etc.) relative to financial variables (such as earnings, book value of equity, revenues, advertising and marketing expenses, product development expenses, etc.). This includes evidence on the differences in investor perceptions of the relative value-relevance of these factors during the bubble and post-bubble periods. The evidence from empirical studies on market irrationality and the mispricing of Internet and other high technology stocks: (i) the underpricing and performance of Internet IPOs; (ii) over-reaction and irrationality of analysts and investors in the pricing of securities; and (iii) the market valuations of equity carve-outs in relation to those of their parent companies. Some directions for future research on Internet stocks are also provided.