Market Valuations in the New Economy: An Investigation of What Has Changed

Abstract

The acceleration of globalization combined with rapid advances in technology and the growing importance of the Internet have led many researchers and practitioners to suggest that a "New Economy" has evolved in which equity valuation is different than in previous periods. We examine the explanatory power and stability of a regression model of equity value on traditional financial variables for a broad sample of firms over the past 25 years and investigate how equity valuation has changed in the recent New Economy sub-period. We also examine subsamples of high-technology firms, young firms, and young firms with losses that are thought to be emblematic of the New Economy. We find that the explanatory power of the regression model declined in recent years for all subsamples of firms. However, for all subsamples of firms, we find that the structure of the regression model is quite stable during the New Economy sub-period, as compared to other sub-periods. Together, these results suggest that traditional explanatory variables of equity value remain applicable to firms in the New Economy sub-period, but that there is greater variation remaining to be explained by uncorrelated omitted factors.

JEL Classification: G12, M41