The Relevance of Web Traffic for Stock Prices of Internet Firms

39 Pages Posted: 15 Feb 2000

See all articles by Shivaram Rajgopal

Shivaram Rajgopal

Columbia Business School

Suresh Kotha

Foster School of Business

Mohan Venkatachalam

Duke University - Fuqua School of Business

Date Written: October 2000

Abstract

This study shows that web traffic is an important non-financial indicator of the market values of Business to Consumer (B2C) Internet firms. We add three important insights to the literature on the value-relevance of traffic. We show that traffic is a summary measure of the strategies that firms use to attract visitors to their websites. The value-relevance of traffic disappears once the exogenous determinants of traffic (e.g., setting up an alliance with America Online, creating affiliate referral programs, generating media visibility, incurring marketing expenditure and constraints imposed by cash availability) are accounted for in the value-relevance model. We also demonstrate that traffic contains no predictive information about future revenues once past revenues are accounted for. The value-relevance of traffic does not stem merely from its role as a predictor of future sales. Finally, we show that the stock market appears to use traffic as a measure of the web businesses' ability to create network effects. Network effects occur when the value of a website to a visitor may depend on how many others visit that site. Consistent with Metcalfe's law of network economics, we find that market values of web businesses increase non-linearly with traffic.

Keywords: Internet, Web Traffic, Valuation, Earnings

JEL Classification: M41, L86, G12

Suggested Citation

Rajgopal, Shivaram and Kotha, Suresh and Venkatachalam, Mohan, The Relevance of Web Traffic for Stock Prices of Internet Firms (October 2000). Available at SSRN: https://ssrn.com/abstract=207989 or http://dx.doi.org/10.2139/ssrn.207989

Shivaram Rajgopal (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Suresh Kotha

Foster School of Business ( email )

University of Washington
Seattle, WA
United States
206-543-4466 (Phone)
206-683-9392 (Fax)

Mohan Venkatachalam

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7859 (Phone)
919-660-7971 (Fax)

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