The Relevance of Web Traffic for Stock Prices of Internet Firms
39 Pages Posted: 15 Feb 2000
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: Suggested Citation
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