Internet Bubble Research Articles

Do today's trades affect tomorrow's IPO allocations?

Underwriters using bookbuilding can allocate shares of initial public offerings (IPOs) on the basis of, among other things, commissions paid by investors. In testing the hypothesis that investors trade liquid stocks in order to affect their IPO allocations, we find that money left on the table by IPOs is related to the trading volume of the 50 most liquid stocks near the offer date. For an IPO that leaves $1 billion on the table, there is abnormal volume of 2.7% to 4.1% in the 50 most liquid stocks over the six days ending on the day that trading commences in that IPO, although only during the internet bubble period is this volume increase statistically significant.

Are Internet Stocks the Trigger of Internet Bubble Bursting?

Are Internet Stocks the Trigger of Internet Bubble Bursting?

Bursting Bubbles

This article explains that the Internet bubble was a unique and unfortunately missed opportunity for strategic management academia to vastly increase the field's perceived legitimacy. This author challenges strategic management scholars to acknowledge this failure, understand it, and reconsider their responsibilitiesto the public and to the field.

Rational fads in investor reactions to electronic commerce announcements: An explanation of the Internet bubble

This work proposes that information cascade theory can help to explain the formation of the Internet bubble. We propose that the bubble existed because a lack of good information about the potential value of electronic commerce led investors to rely on other investors’ private valuations of electronic commerce. We use the event study methodology to estimate returns to company announcements of electronic commerce initiatives in 1999 and 2000. We find that after controlling for network externalities and time trends, investors’ valuations of the returns to electronic commerce initiatives were significantly influenced by the market return from prior periods. Moreover, the relative weight placed on prior periods’ returns decreased as the variance of the prior periods’ returns increased. Both of the results are consistent with the behavior predicted by information cascade theory.

Options and the Bubble

ABSTRACTMany believe that a bubble existed in Internet stocks in the 1999 to 2000 period, and that short‐sale restrictions prevented rational investors from driving Internet stock prices to reasonable levels. In the presence of such short‐sale constraints, option and stock prices could decouple during a bubble. Using intraday options data from the peak of the Internet bubble, we find almost no evidence that synthetic stock prices diverged from actual stock prices. We also show that the general public could cheaply short synthetically using options. In summary, we find no evidence that short‐sale restrictions affected Internet stock prices.

Easier Access to Venture Capital in Silicon Valley: Some Empirical Evidence

Spurred by the remarkable growth of Silicon Valley prior to the Internet bubble, state policymakers throughout the country decided to boost the availability of venture capital to local start-up companies. This paper argues that there is still a great deal to learn from empirical data about the role of the venture capital industry in Silicon Valley. It is shown that Silicon Valley received a large proportion of the nation's total venture capital investment during 1992-2001 and that start-ups in Silicon Valley appear to have easier access to venture capital. They receive the first round of venture capital at a younger age and complete more rounds of venture capital financing. This easier access to capital has a significant effect on start-up performance in Silicon Valley. While the easier access may simply be a result of the higher supply of monetary capital in Silicon Valley, it is also consistent with the view that venture capital in Silicon Valley comes with more human and social capital.

Excess Monetary Liquidity and Asset Prices

The end of the internet bubble on equity markets and, more recently, the prolonged strength of house prices in most industrial countries, have brought questions about the role of monetary policy back to the fore. While management of the money supply has traditionally been aimed at preventing a resurgence in inflation, in the current context of price stability, the debate has shifted towards the supervision of asset prices. Several factors are commonly cited in connection with the notion of a liquidity effect on asset prices: an extended quantity equation of money including asset transactions; easy credit, which promotes purchasing and impacts prices; the direct role of interest rates in computing the fundamental value of assets; and expectations generated by current monetary policy, especially as reflected in low interest rates. This paper seeks to examine the extent to which these theories are germane and to assess whether, in practice, excess liquidity has had a discernable effect on equity and property prices in the euro area, the USA, the UK and Japan since the beginning of the 1980s. We demonstrate that liquidity, which is by definition an overall instrument of purchasing power, does not actually have an across-the-board effect on asset prices. On the contrary, individual asset price movements are bigger than the overall change in aggregate asset prices. Any econometric analysis of the linkage between asset prices and excess liquidity must factor in the possibility of feedback effects from asset prices to money. For this reason, we estimate VAR and VECM models to look at reciprocal interactions in the four geographical zones covered by the paper. It was impossible to clearly demonstrate the effects of excess liquidity on equity prices. The findings for property prices were more nuanced, especially in the case of the UK. However, even where an effect was detected, its impact was limited. Using the available data on France, we explore the notion of the quantity equation of money extended to assets, and measure its relevance. It turns out that adding property or securities transactions to transactions in goods and services does not stabilise the velocity of money. Thus we do not find support from traditional quantity theory for the idea of a transmission from monetary policy to asset prices. In sum, there is only tenuous evidence that excess liquidity affects asset prices. While speculative bubbles may have formed around equity and property prices, they did not wait for help from monetary policy to take shape. Note, however, that this paper was deliberately conducted within a linear setting. The findings do not therefore refute research demonstrating that beyond a certain threshold, excess liquidity represents a threat to financial stability.

The IPO phenomenon in the 1990s

Initial Public Offerings (IPOs) were the most prevalent form of securities issued to raise capital by firms wanting to go public during the last decade (1990–2000) in the United States. The IPO phenomenon got a tremendous boost during the late 1990s by the popularity of the Internet stocks. In the so-called ‘bubble period’ of 1998–1999, hardly a week went by when one or two IPOs, particularly of the Internet variety, did not appear in the capital market. In this paper we have analyzed the IPO phenomenon during 1990–1995 and during 1996–1999. We have also focused on Internet bubble during 1998–1999, and the IPO meltdown after March 2002. We have found that not all IPOs performed well in 1999, the majority of the 25 IPOs that had the highest first-day gains over 200% in 1999 had also a poor performance record during 2001–2002. As the IPOs issued now are few in number, we may not see the kind of ‘irrational exuberance’ as we witnessed in the late 1990s, for the foreseeable future in the United States.

Is the Internet Bubble Consistent with Rationality?

Possibly. We empirically examine the plausibility of rational models designed to explain stock price bubbles associated with technological revolutions such as the internet. Our innovation is to examine the volatility patterns of old economy (brick and mortar) firms that adopted the internet as a medium of commerce (e-Commerce). During the bubble, there is an increase in idiosyncratic risk for firms adopting the technology while post-crash, there is an increase in systematic risk for the same technology adoption by firms both in the stock and options markets. We find some quantitative evidence that the weight of the e-Commerce business to justify the median firm's volatility increase in the bubble period, is borne out five years later with the actual sales data. Overall we conclude that our evidence is consistent with rationality and that both rational and behavioral approaches must provide quantitative predictions in order to have a sharper face off and to better understand asset price bubbles.

Going public to pursue acquisitions

The unique characteristics of newly public firms may motivate acquisitions and cause a unique market perception and performance following these acquisitions. For a sample of more than 400 acquisitions that were made within a year of the IPO, we find that newly public firms experience favorable valuation effects following announcements of their acquisitions. Firms are more likely to finance using stock and the valuation effects are less favorable during the Internet bubble and when venture capitalists are present. Finally, long-term performance following the acquisitions is not different than newly public firms that do not make acquisitions, suggesting that the expected benefits at the time of the announcement do not materialize.

A precursor of market crashes: Empirical laws of Japan's internet bubble

In this paper, we quantitatively investigate the properties of a statistical ensemble of stock prices. We focus attention on the relative price defined as X(t) = S(t)/S(0), where S(0), is the stock price for an onset time of the bubble. We selected approximately 3200 stocks traded on the Japanese Stock Exchange, and formed a statistical ensemble of daily relative prices for each trading day in the 3-year period from January 4, 1999 to December 28, 2001, corresponding to the period in which internet Bubble formed and crashed in the Japanese stock market. We found that the upper tail of the complementary cumulative distribution function of the ensemble of the relative prices in the high value of the price is well described by a power-law distribution, P(S>x) ∼x-α , with an exponent that moves over time. Furthermore we found that as the power-law exponents α approached two, the bubble burst. It is reasonable to suppose that it indicates that internet bubble is about to burst.

Do Today's Trades Affect Tomorrow's IPO Allocations?

Underwriters using bookbuilding have discretionary power for allocating shares of initial public offerings (IPOs). Commissions paid to underwriters by investors are one of the determinants of IPO allocations. We test the hypothesis that investors trade liquid stocks in order to affect their IPO allocations. Consistent with this hypothesis, we find that money left on the table by IPOs affects the trading volume of the 50 most liquid stocks close to the offer date. For an IPO that leaves $1 billion on the table, in the six days ending on the day that trading commences there is abnormal volume in the 50 most liquid stocks of 2.7 to 4.1%, although only during the internet bubble period is this statistically significant.

The acquisition by Steria of Bull's service companies: motivations, negotiations, integration and strategic implications (2000 2004)

The objective of this case study is to analyse in detail the acquisition by Steria, a French IT systems and services company, of the European service companies of its major competitor, Bull. This successful acquisition transformed Steria from a French company to European leader and doubled revenues from euro (€) 500 million to over €1 billion, while always maintaining profitability in spite of the collapse of the 'internet bubble'. We present first the view from the field: the effect on the personnel of the acquired and acquiring companies. Then we present the view from the headquarters of both companies: the motivations of the CEOs, the often contentious negotiations, and the successful integration. We develop the strategic implications of the acquisition for the new 'European' Steria and discuss possible alternatives for achieving the goal of doubling sales by 2006, as set by Steria's CEO. We conclude with 'lessons learned' that may be useful to companies considering major international acquisitions.

Learning from History to Predict Shakeouts in Nascent Stage Industries: the Role of Accounting Information

The dramatic rise and fall of the Internet sector remains a puzzle to investors, regulators and academics, not in small part due to the enormous shareholder wealth erosions associated with the bursting of the Internet bubble. Critics have claimed that poor accounting contributed to the excesses on the upside of the 1990s bull market. As Penman (2003) suggests, however, financial reporting should ideally serve as an anchor during bubbles, to put a check on speculative tendencies. Interestingly, economic history is replete with similar patterns of innovative industries experiencing rapid proliferations of new entrants followed by extensive individual firm failures. These precedents beg the question of whether investors could learn from history to use accounting and other information to better assess the failure risk of IPO firms in future technology industries. We address this research question by developing parsimonious, predominantly accounting-based IPO failure prediction models that are based upon the historical failure experience of IPO firms that utilize innovative ideas or technologies. We use these models to develop strictly out-of-sample forecasts of shakeout firms in the revolutionary Internet industry. We find that accounting information is useful in assessing failure risk for technology firms, and that it was not fully priced into, and therefore could have been used to profitably trade in, the stocks of Internet IPO firms. Using innovative IPO firm based failure prediction models, we generate significant hedge returns by going long (short) in firms that are characterized as having low (high) ex ante failure risk. Our findings demonstrate the importance of historical learning using accounting fundamentals to better assess the likelihoods of failure in future technology industries.

Power Laws and Market Crashes

In this paper, we quantitatively investigate the statistical properties of a statistical ensemble of stock prices. We selected 1200 stocks traded on the Tokyo Stock Exchange, and formed a statistical ensemble of daily stock prices for each trading day in the 3-year period from January 4, 1999 to December 28, 2001, corresponding to the period of the forming of the internet bubble in Japn, and its bursting in the Japanese stock market. We found that the tail of the complementary cumulative distribution function of the ensemble of stock prices in the high value of the price is well described by a power-law distribution, $ P(S>x) \sim x^{-\alpha} $, with an exponent that moves in the range of $ 1.09 < \alpha < 1.27 $. Furthermore, we found that as the power-law exponents $ \alpha $ approached unity, the bubbles collapsed. This suggests that Zipf's law for stock prices is a sign that bubbles are going to burst. PACS: 89.65.Gh

Underwriter Manipulation in Initial Public Offerings

We provide a new explanation for the extremely high level of initial public offering (IPO) underpricing during the Internet bubble years of the late 1990s based on the allocation practices of underwriters. By requiring their customers to buy the stock in the aftermarket in return for IPO allocations (a tie-in agreement), the underwriters created artificial excess demand for the IPOs, leading to distorted (manipulated) price levels in the immediate aftermarket. Empirically, we show that IPOs with tie-in agreements exhibit a distinctly different pattern for the first-day and long-term returns than do IPOs without tie-in agreements during the 1998 to 2000 period, consistent with the model. IPOs with tie-in agreements have seven times higher first-day returns and considerably higher first-day trading volume. However, these stocks begin to underperform significantly starting from the sixth month after the IPO, and the lower returns persist for up to three years after the IPO. We also find that the tie-in IPOs experience significantly lower returns around the lock-up expiration period. Even after controlling for hot market conditions and issuer characteristics such as issue size, underwriter quality, and whether the IPO is a technology stock, we find that manipulation explains much of the unusually high level of underpricing during the late 1990s.

Persuasion in Finance

Persuasion is a fundamental part of social activity, yet it is rarely studied by economists. We compare the traditional economic model, in which persuasion is communication of objectively valuable information, with a behavioral model, in which persuasion is an effort to fit the message into the audience's already held beliefs. We present a simple formalization of the behavioral model, and compare the two models using data on financial advertising in Money and Business Week magazines over the course of the internet bubble. The evidence on the content of the persuasive messages is broadly consistent with the behavioral model of persuasion.

Trust in electronic markets: The convergence of cryptographers and economists (originally published in August 1996)

This paper is included in the First Monday Special Issue #3: Internet banking, e-money, and Internet gift economies, published in December 2005. Special Issue editor Mark A. Fox asked authors to submit additional comments regarding their articles. This paper was certainly a creature of its time. A decade ago the Internet bubble was receiving its first puffs of exaggerated exuberance. For me, this time was also informed by Barlow's A Declaration of the Independence of Cyberspace and more importantly, May's Crypto Anarchist Manifesto. The Internet and the anonymous cryptographic markets that would evolve upon it were immensely exciting. Or, at least their potential was exciting; the vision has yet to be. This text was based on my Master's thesis, which in addition to material found in First Monday also included a protocol for managing trust in information asymmetric relationships via a cryptographic security deposit. The protocol was accepted for presentation at a USENIX conference, but I, nor anyone else to my knowledge, have ever used such an instrument. I continue to buy things over the Internet with a simple credit card; thoughts of digital cash and micro payments are distant memories. However, the themes of this article are still relevant -- even if some of its inspirations are not. If one is interested in the question of trust, what it is, and how it relates to expected values or financial instruments, I hope the work is still of use. And trust is but one aspect of a theme that continues to be much discussed: social relationships. From digital reputation, to social protocols, social networks, and now social computing -- though this label too seems to be fading -- a prevalent question continues to be how do we replicate and augment social relations in this technologically mediated space? The expectation that this could be done with cryptographic systems may now, 10 years later, seem overly ambitious. Indeed in their 2000 book The Social Life of Information John Seely Brown and Paul Duguid cite this paper when they asked: "Can it really be useful, after all, to address people as information processors or to redefine complex human issues such as trust as 'simply information?'" Perhaps, in the next decade we will see widespread computerized reputation markets. Or, maybe they are already here, with things like Amazon's book ratings, rankings in the blogosphere, and collaborative filters. First Monday continues to provide analysis of this compelling space, but, in considering this article, it also reflects how we have changed in our ways of thinking about it. Relative to information security and electronic commerce, trust is a necessary component. Trust itself represents an evaluation of information, an analysis that requires decisions about the value of specific information in terms of several factors. Methodologies are being constructed to evaluate information more systematically, to generate decisions about increasingly complex and sophisticated relationships. In turn, these methodologies about information and trust will determine the growth of the Internet as a medium for commerce.

Individual Investor Sentiment and Long-Run Performance of IPOs

This paper examines whether intense individual investor sentiment leads to poor long-run IPO performance in the U.S. market. Using order imbalance for small trades on the IPO day to proxy for individual investor sentiment for IPOs issued between 1994 and 2002, we find that there is a negative relation between individual investor sentiment and long-run IPO performance for IPOs issued during the 1999-2000 internet bubble period but not for the non-bubble period. The empirical results are robust for returns measured both in event-time and in calendar-time. Our findings are consistent with existing theoretical models claiming that the negative sentiment-return relation applies when there is a large pool of bullish individual investors in a hot IPO market.

EXPERTS' EARNING FORECASTS: BIAS, HERDING AND GOSSAMER INFORMATION

We study the statistics of earning forecasts of US, EU, UK and JP stocks during the period 1987–2004. We confirm, on this large data set, that financial analysts are on average over-optimistic and show a pronounced herding behavior. These effects are time dependent, and were particularly strong in the early 1990s and during the Internet bubble. We furthermore find that their forecast ability is, in relative terms, quite poor and comparable in quality, a year ahead, to the simplest "no change" forecast. As a result of herding, analysts agree with each other five to ten times more than with the actual result. We have shown that significant differences exist between US stocks and EU stocks, that may partly be explained as a company size effect. Interestingly, herding effects appear to be stronger in the US than in the Eurozone. Finally, we study the correlation of errors across stocks and show that significant sectorization occurs, some sectors being easier to predict than others. These results add to the list of arguments suggesting that the tenets of Efficient Market Theory are untenable.