Skip navigation

DotCom Mania: The Rise and Fall of Internet Stock Prices

Authors: Ofek, Eli
Richardson, Matthew
Issue Date: Nov-2001
Series/Report no.: FIN-01-037
Abstract: This paper provides one potential explanation for the rise, persistence and eventual fall of internet stock prices. Specifically, we appeal to a model of heterogenous agents with varying degrees of beliefs about asset payoffs who are subject to short sales constraints. In this framework, it is possible that “optimistic” investors overwhelm “pessimistic” ones, leading to prices not reflecting fundamental values about cash flows summarized by aggregate beliefs. Empirical support for this explanation is provided by exploring the behavior of internet stock prices during the period January 1998 to November 2000. In particular, we document four important elements to our story: (i) the high level of internet stock prices given their underlying fundamentals, (ii) responses of stock prices to a shift towards potentially optimistic investors, (iii) empirical results consistent with shorting being at its maximum possible level for internet stocks, and (iv) the eventual fall, or bubble bursting, of internet stocks being tied to the increase in the number of sellers to the market via expiration of lockup agreements.
Appears in Collections:Economics Working Papers

Files in This Item:
File Description SizeFormat 
FIN-01-037.pdf176.78 kBAdobe PDFView/Open

Items in FDA are protected by copyright, with all rights reserved, unless otherwise indicated.