Dot.com bubble(1995-2000)- a period of magnification in the adaptation of Internet.
This article studies the impact and overview of the dot.com bubble 2.0 in the world. The NASDAQ Composite Index, which traditionally lists more technology oriented companies than any other stock market index in the U.S. closed at 5,073 points, which is for the first time higher than the peak that had been reached during the dot-com bubble that burst the usage of internet. As a consequence, there is a growing public interest in whether the present growth rates in the technology sector are to be seen as sustainable, or if growth rather appears to be inflated as during the dot-com bubble, which eventually had devastating consequences for the economy.
In the value relevance analysis, we confirm results of previous researchers that documented an increase in the relation between market values and traditional accounting fundamentals after the dot-com bubble. This indicates that investors might have returned to more rational investment strategies after the burst of the bubble. By extending the model until 2013, we are able to document that the value relevance of accounting fundamentals displays a decreasing trend over the last three years, which is in contrast to the development during the years after the dot-com bubble. This implies that investors potentially acted less rational and might have used more irrational investment strategies during the last three years.
It can be resumed that the current development in the technology industry is not yet to be seen as a bubble, or close to a bubble. However, looking forward, if the trading behavior continues to develop more towards irrational behavior, as it might have during the last three years, a situation as during the dot-com bubble, might possibly occur over the next few years. This would be illustrated by a further decrease in value relevance of accounting fundamentals.
Keywords: Dot-com Bubble ,Value Relevance Model, NASDAQ Composite Index, Relevance of Accounting Fundamentals.
The dot-com boom refers to the speculative investment bubble that formed around Internet companies between 1995 and 2000. The soaring prices of Internet start-ups encouraged investors to pour more money into any company with a “.com” or an “e-something” in its business plan. This excess capital encouraged Internet companies to form, often with very little planning, in order to get in on some of the easy money that was available at the time.
The dot-com boom is also known as the dot-com bubble, Internet bubble, IT bubble or Internet boom.
The dot-com bubble started to grow by investments in Internet companies and the NASDAQ Composite Index rose from under 1,000 points in 1995 to more than 5,000 points in early 2000. At that time companies were going public with initial public offerings (IPOs) and received enormous valuations, with stock prices sometimes doubling on the first day. However, in March 2000, the boom came to a crashing halt and the bubble began to pop. The American economy consequently slowed down and finally ended up in a full recession.
There has recently been an increasing public interest in the aftermath of the dot-com bubble in 2000, after the NASDAQ Composite Index hit its all time peak slightly above 5,000 again in spring 2015. At the same time, also private companies operating in the technology sector, that are not listed on any stock market index – such as the NASDAQ Composite – received increased sums in funding from venture capitalists or other investors over the last 3-5 years (PWC, 2014). More than 80 startups, so called ‘unicorns’, including companies like Uber and AirBnB, are held privately and have received valuations above $1 billion based on multiples of revenues lately.
The bubble burst
Around the turn of the millennium, spending on technology was volatile as companies prepared for the Year 2000 problem, which, when the clocks changed to the year 2000, actually had minimal impact.
On January 10, 2000, America Online, led by Steve Case and Ted Leonsis announced a merger with Time Warner, led by Gerald M. Levin. The merger was the largest to date and was questioned by many analysts.
In February 2000, with the Year 2000 problem no longer a worry, Alan Greenspan announced plans to aggressively raise interest rates, which led to significant stock market volatility as analysts disagreed as to whether or not technology companies would be affected by higher borrowing costs.
On March 10, 2000, the NASDAQ Composite stock market index peaked at 5,048.62.
On March 13, 2000, news that Japan had once again entered a recession triggered a global sell off that disproportionately affected technology stocks.
On March 15, 2000, Yahoo and eBay ended merger talks and the Nasdaq fell 2.6% but the S&P 500 Index rose 2.4% as investors shifted from strong performing technology stocks to poor performing established stocks.
On March 20, 2000, Barron’s featured a cover article titled “Burning Up; Warning: Internet companies are running out of cash — fast”, which predicted the imminent bankruptcy of many internet companies. This led many people to rethink their investments. That same day, Microstrategy announced a revenue restatement due to aggressive accounting practices. Its stock price, which had risen from $7 per share to as high as $ 333 per share in a year, fell $140 per share, or 62%, in a day.The next day, the Federal Reserve raised interest rates, leading to an inverted yield curve, although stocks rallied temporarily.
On April 3, 2000, judge Thomas Penfield Jackson issued his conclusions of law in the case of United States v. Microsoft Corp. (2001) and ruled that Microsoft was guilty of monopolization and tying in violation of the Sherman Antitrust Act . This led to a one-day 15% decline in the value of shares in Microsoft and a 350-point, or 8%, drop in the value of the Nasdaq. Many people saw the legal actions as bad for technology in general. That same day, Bloomberg published a widely read article that stated: “It’s time, at last, to pay attention to the numbers”.
On Friday, April 14, 2000, the Nasdaq Composite index fell 9%, ending a week in which it fell 25%. Investors were forced to sell stocks ahead of Tax Day, the due date to pay taxes on gains realized in the previous year.
By June 2000, dot-com companies were forced to rethink their advertising campaigns.
On November 9, 2000, Pets.com, a much-hyped company that had backing from Amazon.com, went out of business only nine months after completing its IPO. By that time, most internet stocks had declined in value by 75% from their highs, wiping out $1.755 trillion in value.
In January 2001, just three dot-com companies bought advertising spots during Super Bowl XXXV: E-Trade, Monster.com, and Yahoo Hot Jobs .The September 11 attacks accelerated the stock-market drop later that year.
Investor confidence was further eroded by several accounting scandals and the resulting bankruptcies, including the Enron scandal in October 2001, the Worldcom scandal in June 2002 and the Adelphia Communications Corporation scandal in July 2002.
By the end of the stock market downturn of 2002, stocks had lost $5 trillion in market capitalization since the peak. At its trough on October 9, 2002, the NASDAQ-100 had dropped to 1,114, down 78% from its peak.
After venture capital was no longer available, the operational mentality of executives and investors completely changed. A dot-com company’s lifespan was measured by its burn rate, the rate at which it spent its existing capital. Many dot-com companies ran out of capital and went through liquidation. Supporting industries, such as advertising and shipping, scaled back their operations as demand for services fell. However, many companies were able to endure the crash; 48% of dot-com companies survived through 2004, albeit at lower valuations.
Several companies and their executives were accused or convicted of fraud for misusing shareholders’ money, and the U.S. Securities and Exchange Commission levied large fines against investment firms including Citigroup and Merrill Lynch for misleading investors.
After suffering losses, retail investors transitioned their investment portfolios to more cautious positions.