The Rise and Fall of Internet Stocks: Should Finanical Analysts be Blamed?

36 Pages Posted: 12 Mar 2001  

Qiao Liu

The University of Hong Kong - School of Economics and Finance; Peking University - Guanghua School of Management

Frank M. Song

The University of Hong Kong - School of Economics and Finance

Date Written: March 2001

Abstract

Using both the summary and detailed financial analysts earnings forecasts data from I/B/E/S, we study the role of financial analysts in the most recent Internet stock bubble. We examined the change of financial analysts' earnings forecasts around the Internet crash in April 2000. The empirical results suggest that financial analysts did indeed share some blame in the formation of the Internet stock bubble. Financial analysts as a whole were too optimistic about the Internet stocks before the market crash in April 2000. The rationality tests also suggest their earnings forecasts before the crash were less than rational. However, they revised down their earnings forecasts significantly after the burst of the bubble. We further documented that financial analysts whose employer was a lead underwriter for the Internet company (affiliated analysts) were actually more negative in their quarterly earnings forecasts relative to those of non-affiliated analysts. We interpret the latter evidence as supporting a conflict of interest hypothesis that affiliated analysts have incentive to accommodate managers' motive to underreport the earnings in order to have actual earnings "beat" the market expectations.

Keywords: Internet stocks, bubbles, finanical analysts, forecast bias, conflict of interests

JEL Classification: G10, G14, G24

Suggested Citation

Liu, Qiao and Song, Frank M., The Rise and Fall of Internet Stocks: Should Finanical Analysts be Blamed? (March 2001). Available at SSRN: https://ssrn.com/abstract=262807 or http://dx.doi.org/10.2139/ssrn.262807

Qiao Liu (Contact Author)

The University of Hong Kong - School of Economics and Finance ( email )

School of Economics and Finance
Pokfulam
Hong Kong
Hong Kong
852-2859-1059 (Phone)
852-2548-1152 (Fax)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Frank M. Song

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong

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