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Managerial Actions, Stock Returns, and Earnings: The Case of Business-to-Business Internet Firms

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  • Venkatachalam, Mohan

    (Stanford U)

  • Rajgopal, Shivaram

    (U of Washington)

  • Kotha, Suresh
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    Abstract

    In this study we investigate the role played by managerial actions in explaining stock market returns and accounting earnings of 57 Internet firms engaged in Business-to-Business (B2B) e-commerce. We classify 3,166 managerial actions undertaken by our sample firms between the firm's IPO date and September 30, 2000 into ten key action categories: (1) acquisition of major customers, (2) introduction of new products and services, (3) promotional and marketing actions, (4) expansion into international markets, (5) actions taken to address the concerns of stakeholders such as employees and the community at large, (6) announcements of technology, marketing, and distribution alliances, (7) completion of acquisitions, (8) management team building actions, (9) announcement of recognition and awards bestowed upon the firm, and (10) organizational changes. We undertake an event study over a three-day window surrounding the announcement of each action. Our event study results indicate that announcements of alliances (technology, marketing, and distribution), acquisition of new customers, and promotions are associated with positive abnormal returns. Next, using the factor analysis technique we group the counts of managerial actions taken by each firm over its post-IPO life into three broad managerial initiatives-market penetration, organization building, and legitimacy building. These three initiatives explain a substantial portion of the cross-sectional variation in the firms' post-IPO life stock market returns beyond that explained by accounting earnings. However, accounting earnings do not explain variation in post-IPO stock returns. Thus, investors appear to supplement relatively meager accounting information with data about managerial actions in setting stock prices of B2B Internet firms.

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    Bibliographic Info

    Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1673.

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    Date of creation: Dec 2000
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    Handle: RePEc:ecl:stabus:1673

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    1. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Amir, Eli & Lev, Baruch, 1996. "Value-relevance of nonfinancial information: The wireless communications industry," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 22(1-3), pages 3-30, October.
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    4. Williamson, Oliver E., 1989. "Transaction cost economics," Handbook of Industrial Organization, Elsevier, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 3, pages 135-182 Elsevier.
    5. Chaney, Paul K & Devinney, Timothy M & Winer, Russell S, 1991. "The Impact of New Product Introductions on the Market Value of Firms," The Journal of Business, University of Chicago Press, vol. 64(4), pages 573-610, October.
    6. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, Elsevier, vol. 8(3), pages 205-258, September.
    7. Dan Elfenbein & Josh Lerner, 2001. "Links and Hyperlinks: An Empirical Analysis of Internet Portal Alliances, 1995-1999," NBER Working Papers 8251, National Bureau of Economic Research, Inc.
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