Profits, loses of internet stock
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Profits, loses of internet stock
Profits, losses and the non-linear pricing of Internet stocksProfessor John R. M. Hand Kenan-Flagler Business School UNC Chapel HillChapel Hill, NC 27 Profits, loses of internet stock 7599-3490Tel: (919)962-3173Fax:(919)962-4727handfritmc.eduAbstractTills paper sheds light on tile economics of Internet linns by extracting information on major value-drivers from their stock prices. Contrary to conventional Wall Street wisdom that there is little or no metliod in the pricing of Net Profits, loses of internet stock stocks. I find that basic accoiuiting data are highly value-relevant in a simple nonlinear manner. Using log-linear regression on quarterly data forProfits, loses of internet stock
167 Net linns over the period 1997:Q 1-1999:Ọ2.1 show that Net linns' market values are linear and increasing in book equity, but concave and increasiProfits, losses and the non-linear pricing of Internet stocksProfessor John R. M. Hand Kenan-Flagler Business School UNC Chapel HillChapel Hill, NC 27 Profits, loses of internet stock positively priced, hl contrast, and consistent with the argiunent that very large marketing costs are intangible assets, not period expenses. Net firms' market values are reliably positive and concave in selling and marketing expenses when net income is negative, particularly during tile first two Profits, loses of internet stock fiscal quarters after tile IPO. R&D expenditures are priced in a similarly concave manner. although more durably beyond tile IPO than are marketing coProfits, loses of internet stock
sts. The concavity in tile pricing of core net income. R&D costs, and selling and marketing expenses runs counter to tlie notion tliat Net finns are eProfits, losses and the non-linear pricing of Internet stocksProfessor John R. M. Hand Kenan-Flagler Business School UNC Chapel HillChapel Hill, NC 27 Profits, loses of internet stock stocks; non-linear valuation; profits; losses; intangible assets.JEL classifications: G12. G14, M41.First draft: July 30. 1999This draft: January 10.2000V 2000 John R. M. Hand. All rights reserved. Tills work is supported by a KPMG Research Fellowship. My thanks to Barbara Murray and Susie Schoeck f Profits, loses of internet stock or research assistance. The paper has benefited from comments by Professors Blacconiere. Bushman. Erickson. Landsman. Maines. Maydew. Myers. Salamon,Profits, loses of internet stock
Shackelford. Slezak. Smith and Wahlen. and feedback from seminar participants at uc Berkeley, tile University of Chicago. Indiana University and UNC CProfits, losses and the non-linear pricing of Internet stocksProfessor John R. M. Hand Kenan-Flagler Business School UNC Chapel HillChapel Hill, NC 27 Profits, loses of internet stock ably exceeds $1.3 trillion dollars versus S50 billion a mere tliree years ago. I define a Net Ann as one that would not exist if it were not for foe Internet. and for which 51% or more of its revenues come from or because of foe Internet.Due to its rapid and world-wide impact on business and communi Profits, loses of internet stock cations, foe Internet is seen by many as a revolution akin to foat triggered by earlier technological innovations such as moveable type, radio, the teProfits, loses of internet stock
lephone, and rite computer. The enormous wealth created by Net firms and their spectacular stock returns (see figure 1) have also come to epitomize thProfits, losses and the non-linear pricing of Internet stocksProfessor John R. M. Hand Kenan-Flagler Business School UNC Chapel HillChapel Hill, NC 27 Profits, loses of internet stock ernet is changing the business landscape has preempted structured description or economic analysis of Net firms. Periiaps because of this, many influential but unsubstantiated claims exist about die links between foe valuations of Net companies and primitive economic forces. My research aims to sepa Profits, loses of internet stock rate fact from fiction by quantifying and analyzing key economic characteristics of Net firms' operations, and drivers of foefr stock market valuationProfits, loses of internet stock
s.The prevailing view of die pricing of Internet stocks is well illustrated by a recent quote from The Wall Street Journal'. ‘’Internet stocks, die coProfits, losses and the non-linear pricing of Internet stocksProfessor John R. M. Hand Kenan-Flagler Business School UNC Chapel HillChapel Hill, NC 27 Profits, loses of internet stock ns abound. Some assert that conventional metrics such as earnings and book values are irrelevant to the pricing of Net stocks, because non-financial metrics call all the shots. Others claim that revenues are die key driver of Net stock prices. Many analysts and commentators advocate that larger loss Profits, loses of internet stock es create higher market values because they reflect Net linns' huge investments in intangible marketing assets. Still odiers argue diat Net stock pricProfits, loses of internet stock
es reflect die unique profit opportunities provided by ••Internet space", such as die increasing retums-to-scale arising from a winner-takes-all businProfits, losses and the non-linear pricing of Internet stocksProfessor John R. M. Hand Kenan-Flagler Business School UNC Chapel HillChapel Hill, NC 27 Profits, loses of internet stock major value-drivers of Net Anns from their stock prices. Contraiy to the conventional wisdom. I find that basic accounting data are liigldy value-relevant, albeit in a nonlinear maimer. Using quarterly data for 167 Net linns over die9period 1997:Q1-1999:Q2,1 show that Net linns' log-transformed mark Profits, loses of internet stock et values are neatly linear in both log-transfonncd book equity and log-transfonned net income. Translating die log-log regression results back into dProfits, loses of internet stock
icứ underlying dolktr value metric indicates that Nel linns’ market values are linear and increasing in book equity, but concave and increasing (decreProfits, losses and the non-linear pricing of Internet stocksProfessor John R. M. Hand Kenan-Flagler Business School UNC Chapel HillChapel Hill, NC 27 Profits, loses of internet stock irms. I find similar results in two control groups: a random sample of non-Net firms over rhe period I997:QI I9991Q2. and non-Net firms that went public at die same time as Net firms. Ĩ also demonstrate diat log-linear regressions yield lower pricing errors tor Net stocks titan do regressions using Profits, loses of internet stock per-share or unsealed data. Lower pricing errors are also generally obtained Jrom log-linear regressions than fium per-share or unsealed regressions lProfits, loses of internet stock
or non-Nct linns.When Net linns' earnings are decomposed into revenues and expenses, revenues are found to be positively priced, mid in a concave mannProfits, losses and the non-linear pricing of Internet stocksProfessor John R. M. Hand Kenan-Flagler Business School UNC Chapel HillChapel Hill, NC 27 Profits, loses of internet stock increasing and concave in selling and marketing expenses when net income is negative, particularly during tile first two fiscal quarters following tlie IPO. R&D expenditures are also positively priced in a concave manner, although more durably beyond the IPO than are marketing costs. If accounting d Profits, loses of internet stock ata adequately proxy for true economic profitability, then the concavity in the pricing of net income. R&D costs and selling and marketing expenses BiProfits, loses of internet stock
ns counter to the notion the Nel finns are expected to benefit twin extraordinary profitability in large strategic options they hold, or increasing reProfits, losses and the non-linear pricing of Internet stocksProfessor John R. M. Hand Kenan-Flagler Business School UNC Chapel HillChapel Hill, NC 27 Profits, loses of internet stock conclude that tliere is a high degree of method in the pricing of Internet stocks: Net firms' market values are strongly correlated with accounting data in the logarithmic scale.1 he remainder of lire paper proceeds as follows. Section 2 summarizes the emerging research in accounting and finance abo Profits, loses of internet stock ut Internet firms. Section 3 details the sources used to obtain the approximate population of publicly traded Net firms, as well as two groups of non-Profits, loses of internet stock
Ncl firms. Section 4 compares Nel and non-Nel linns across a variety of past, present and forecasted economic dimensions. Section 5 delineates and tesProfits, losses and the non-linear pricing of Internet stocksProfessor John R. M. Hand Kenan-Flagler Business School UNC Chapel HillChapel Hill, NC 27 Profits, loses of internet stock hod that is almost entirely new to accounting-based valuation research, namely log-linear regressions. Section 5 also reports die results of3tests assessing the robustness of die log-linear regression methods for both Net and non-Net firms. Section 6 concludes.2Existing research in accounting and fi Profits, loses of internet stock nance on the economics of Internet firmsGiven the speed with which e-business lias arisen, academic accounting and finance research into the economicsProfits, loses of internet stock
of the Internet and Net firms has only recently begun to emerge. I briefly discuss the work I am familiar with. Wysocki (1999a) examines the cross-seProfits, losses and the non-linear pricing of Internet stocksProfessor John R. M. Hand Kenan-Flagler Business School UNC Chapel HillChapel Hill, NC 27 Profits, loses of internet stock nt period message-posting activity on The .Motley Fool stock chat boards to test Kim and Verrecchia’s (1997) predictions on the relation between trading volume during an earnings announcement and die amount of investor private information prior to and dining die earnings announcement. Cooper. Dimitr Profits, loses of internet stock ov and Rail (1999) document a striking mean abnormal stock return of 125% for the ten days surrounding the announcement by a firm dial it is changingProfits, loses of internet stock
its name to a Net related “.com" one.Hand (2000a) examines the proposition that Net firms dramatically underprice their IPOs in order to purchase favoGọi ngay
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