Understanding the High-Tech Bubble from Evidence

Abstract

This paper investigates the high-tech bubble in the late 1990s. We intend to identify possible causes and factors that lead to its formation. Using a large sample of 39,673 firm-level observations covering a wide range of firms, we find a positive relationship between venture capital investment and equity overvaluation in the bubble period. Specifically, we find that a firm supported by venture capitalists (VCs) is more likely to be overvalued in the bubble period, especially if it is financed by younger VCs and/or larger VCs. We also find that the lead VC of the syndicate of investors plays an important role. In particular, the investment amount and characteristics of the lead VC, such as its organizational type and experience, are important. Specifically, a VC-backed firm is more likely to be overvalued in the bubble period if the lead VC invests more, and/or has a more independent organizational structure, and/or is more experienced. By examining the responses of experienced VCs to market signals, we further find that less experienced VCs are more likely to invest more when the market booms in the bubble period. In sharp contrast, these correlations generally do not hold or hold only marginally outside the bubble period.