Dotcommania: The Rise and Fall of Internet Stock Prices

NYU Stern Department of Finance, Working Paper No. FIN-01-037

56 Pages Posted: 17 Dec 2001

See all articles by Matthew P. Richardson

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

Eli Ofek

New York University (NYU) - Department of Finance

Date Written: November 6, 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.

JEL Classification: G

Suggested Citation

Richardson, Matthew P. and Ofek, Eli, Dotcommania: The Rise and Fall of Internet Stock Prices (November 6, 2001). NYU Stern Department of Finance, Working Paper No. FIN-01-037, Available at SSRN: https://ssrn.com/abstract=293964 or http://dx.doi.org/10.2139/ssrn.293964

Matthew P. Richardson (Contact Author)

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

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National Bureau of Economic Research (NBER)

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AQR Capital Management, LLC ( email )

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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

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