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The Value Relevance of Network Advantages: The Case of E–Commerce Firms

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  • Shivaram Rajgopal
  • Mohan Venkatachalam
  • Suresh Kotha

Abstract

We show that network advantages constitute an important intangible asset that goes unrecognized in the financial statements. For a sample of e–commerce firms, we find that network advantages created by Web site traffic have substantial explanatory power for stock prices over and above traditional summary accounting measures such as earnings and book value of equity. Also, network advantages are positively associated with one–year–ahead and two–year–ahead earnings forecasts provided by equity analysts. When we allow network advantages to be endogenously determined by managerial actions, we find that at least part of the value relevance of network effects stems from the presence of affiliate referral programs and higher media visibility.

Suggested Citation

  • Shivaram Rajgopal & Mohan Venkatachalam & Suresh Kotha, 2003. "The Value Relevance of Network Advantages: The Case of E–Commerce Firms," Journal of Accounting Research, Wiley Blackwell, vol. 41(1), pages 135-162, March.
    • Handle: RePEc:bla:joares:v:41:y:2003:i:1:p:135-162
    DOI: 10.1111/1475-679X.00099
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