AbstractUntil its sales of a product materialize, a firm is a "pre-producer" in the market for that product. That firm may may be a new start-up, or it may already sell other products. Firms that do not succeed in generating sales eventually become discouraged and move on to other activities. When this fate befalls a lot of firms, as it recently did in several IT-related businesses, the industry experiences a "shakeout." In the model that I will present, during the shakeout some firms switch to flatter, safer earnings. This switch raises earnings at the time of the shakeout but lowers them in the long run, and it therefore raises earnings-price ratios. This has happened on the Nasdaq since March, 2000 when the Nasdaq shakeout began.
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Date of creation: Sep 2004
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Other versions of this item:JEL classification:
- L0 - Industrial Organization - - General
- G3 - Financial Economics - - Corporate Finance and Governance
This paper has been announced in the following NEP Reports:
- NEP-ACC-2004-09-30 (Accounting & Auditing)
- NEP-ALL-2004-09-30 (All new papers)
- NEP-ENT-2004-09-30 (Entrepreneurship)
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