Dotcom Mania: The Rise and Fall of Internet Stock Prices

56 Pages Posted: 6 Dec 2001 Last revised: 1 Aug 2022

See all articles by Eli Ofek

Eli Ofek

New York University (NYU) - Department of Finance

Matthew P. Richardson

Department of Finance, Leonard N. Stern School of Business, New York University

Multiple version iconThere are 4 versions of this paper

Date Written: December 2001

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.

Suggested Citation

Ofek, Eli and Richardson, Matthew P., Dotcom Mania: The Rise and Fall of Internet Stock Prices (December 2001). NBER Working Paper No. w8630, Available at SSRN: https://ssrn.com/abstract=293243

Eli Ofek

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States

Matthew P. Richardson (Contact Author)

Department of Finance, Leonard N. Stern School of Business, New York University ( email )

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