Financial Analysts' Role in the 1996-2000 Internet Bubble
30 Pages Posted: 22 Feb 2007
Date Written: July 2006
We investigate financial analysts' role during the 1996-2000 "Internet Bubble" period, comparing their recommendations in this sector to those for other new companies over the same time period. Our research addresses the following two questions: (1) were financial analysts relatively more optimistic about Internet stocks than about other new issues during the 1996-2000 period? and (2) did their relative optimism for Internet stocks (if it existed) inflate the prices of these stocks, creating or fueling the Internet Bubble? By using other new issues in this time period as our comparison group, we control for analysts' documented optimism when initiating coverage and around equity issues. We find evidence that analysts made higher recommendations for Internet stocks than for other new issues, beginning in 1998, and that their recommendations were influenced by past stock returns. We also find a positive relation between analyst optimism and subsequent market-adjusted stock returns, particularly in the Internet sector within the stocks' IPO year; this relation persists even after we control for Fama-French (1993) risk factors. Based on these results, we conclude that analysts are relatively more optimistic about Internet IPOs than IPOs in other sectors and their relative optimism contributes to the formation of the 1996-2000 "Internet Bubble".
Keywords: Financial Analyst, analyst recommendation, Internet Bubble, IPO
JEL Classification: A00
Suggested Citation: Suggested Citation