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The Valuation and Market Rationality of Internet Stock Prices

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  • Eli Ofek
  • Matthew Richardson
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    Abstract

    This paper provides an analysis of some existing as well as new evidence of the relation between market prices and fundamentals in the Internet sector over the period January 1998 to February 2000. Appealing to results across a broad class of outcomes, we demonstrate a strong, circumstantial case against market rationality. In particular, we investigate (i) the level of Internet stock prices given their underlying fundamentals, (ii) responses of stock prices to information-based events, and (iii) the volatility of Internet prices. We review several potential explanations of these phenomena, including one based on heterogeneous beliefs across investors who are subject to short sales constraints. We provide a discussion of the empirical evidence supporting this latter explanation. Copyright 2002, Oxford University Press.

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    Bibliographic Info

    Article provided by Oxford University Press in its journal Oxford Review of Economic Policy.

    Volume (Year): 18 (2002)
    Issue (Month): 3 ()
    Pages: 265-287

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    Handle: RePEc:oup:oxford:v:18:y:2002:i:3:p:265-287

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    Web page: http://oxrep.oupjournals.org/

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    Cited by:
    1. Lubos Pastor & Pietro Veronesi, 2003. "Stock Prices and IPO Waves," NBER Working Papers 9858, National Bureau of Economic Research, Inc.
    2. Lubos Pastor & Pietro Veronesi, 2004. "Was There a Nasdaq Bubble in the Late 1990s?," NBER Working Papers 10581, National Bureau of Economic Research, Inc.
    3. Thomas Schuster, 2003. "Meta-Communication and Market Dynamics. Reflexive Interactions of Financial Markets and the Mass Media," Finance 0307014, EconWPA.
    4. Boswijk, H. Peter & Hommes, Cars H. & Manzan, Sebastiano, 2007. "Behavioral heterogeneity in stock prices," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 1938-1970, June.
    5. Goldfarb, Brent & Kirsch, David & Miller, David A., 2007. "Was there too little entry during the Dot Com Era?," Journal of Financial Economics, Elsevier, vol. 86(1), pages 100-144, October.
    6. Jonathan Temple, 2002. "An Assessment of the New Economy," Bristol Economics Discussion Papers 02/542, Department of Economics, University of Bristol, UK.
    7. Bertus, Mark & Godbey, Jonathan & Hinkelmann, Christoph & Mahar, James W., 2008. "Noise, equity prices, and hedging: A new approach," International Review of Financial Analysis, Elsevier, vol. 17(5), pages 886-902, December.
    8. Richard Chung & Scott Fung & James Shilling & Tammie Simmons-Mosley, 2011. "What Determines Stock Price Synchronicity in REITs?," The Journal of Real Estate Finance and Economics, Springer, vol. 43(1), pages 73-98, July.
    9. Nittai K. Bergman & Dirk Jenter, 2005. "Employee Sentiment and Stock Option Compensation," NBER Working Papers 11409, National Bureau of Economic Research, Inc.
    10. Aharon, David Y. & Gavious, Ilanit & Yosef, Rami, 2010. "Stock market bubble effects on mergers and acquisitions," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(4), pages 456-470, November.
    11. Lisi Shi & Richard M. H. Suen, 2014. "The Macroeconomic Consequences of Asset Bubbles and Crashes," Working papers 2014-14, University of Connecticut, Department of Economics.
    12. Croonenbroeck, Carsten & Monaco, Fabrizio Leonardo & Christensen, Mads Julius, 2012. "Does Danish football club Brøndby swim with the fishes? An application of the reversed news model," Discussion Papers 330, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
    13. Bogan, Vicki, 2009. "Bubbles or convenience yields? A theoretical explanation with evidence from technology company equity carve-outs," International Review of Economics & Finance, Elsevier, vol. 18(2), pages 248-281, March.
    14. Peter Boswijk & Cars H. Hommes & Sebastiano Manzan, 2005. "Behavioral Heterogeneity in Stock Prices," Tinbergen Institute Discussion Papers 05-052/1, Tinbergen Institute.

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