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DotCom Mania: The Rise and Fall of Internet Stock Prices

  • Eli Ofek
  • Matthew Richardson
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    This paper provides one potential explanation for the rise, persistence and eventual fall of internet stock prices. Specifically, we appeal to a model of heterogenous agents with varying degrees of beliefs about asset payoffs who are subject to short sales constraints. In this framework, it is possible that 'optimistic' investors overwhelm 'pessimistic' ones, leading to prices not reflecting fundamental values about cash flows summarized by aggregate beliefs. Empirical support for this explanation is provided by exploring the behavior of internet stock prices during the period January 1998 to November 2000. In particular, we document four important elements to our story: (i) the high level of internet stock prices given their underlying fundamentals, (ii) responses of stock prices to a shift towards potentially optimistic investors, (iii) empirical results consistent with shorting being at its maximum possible level for internet stocks, and (iv) the eventual fall, or bubble bursting, of internet stocks being tied to the increase in the number of sellers to the market via expiration of lockup agreements.

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    File URL: http://www.nber.org/papers/w8630.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8630.

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    Date of creation: Dec 2001
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    Publication status: published as Eli Ofek & Matthew Richardson, 2003. "DotCom Mania: The Rise and Fall of Internet Stock Prices," Journal of Finance, American Finance Association, vol. 58(3), pages 1113-1138, 06.
    Handle: RePEc:nbr:nberwo:8630
    Note: AP
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