Internet Stock
Essay by review • February 3, 2011 • Research Paper • 4,308 Words (18 Pages) • 1,269 Views
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Summer Research Paper
Investigating the Role of Financial Analysts in the
Internet Bubble
Conducted by: Yao Tian
Supervised by: Pat O'Brien
Summer, 20041
1 I thank Pat O'Brien for her insight and research guidance and Sean Speers for his technical help.
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Table of Contents
Abstract ............................................................................................................................... 3
1. Introduction................................................................................................................... 4
2. Literature Review and Hypothesis Development....................................................... 7
2.1 Analysts' Forecast/Recommendation Optimism..................................................... 7
2.2 Internet Stock Overpricing ...................................................................................... 8
2.3 Hypothesis Development........................................................................................ 10
3. Research Design .......................................................................................................... 10
3.1 Sample Selection .................................................................................................... 10
3.2 Data Collection....................................................................................................... 12
4. The Logistic Regression - Tests for H1..................................................................... 12
4.1 The Logistic Model ................................................................................................ 12
4.2 The Yearly Analysis ............................................................................................... 20
5. The OLS analysis - Test for H2................................................................................. 22
6. Conclusion ................................................................................................................... 24
References....................................................................................................................... 26
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Investigating the Role of Financial Analysts in the
Internet Bubble
Abstract
This paper empirically investigates the role of financial analysts in the 1996-2000
Internet Bubble. It addresses the following two research questions: (1) were financial
analysts relatively more optimistic about Internet stocks than other stocks during the
Internet Bubble period and (2) did their relative optimism for the Internet stocks inflate
the prices of these stocks to create the Internet Bubble. Using a Logistic Regression of
recommendations on industry sectors, I investigate analysts' relative optimism for the
Internet stocks while controlling for their over-optimism for all stocks in general and
their relative optimism for IPO stocks in particular. The results suggest that during the
Internet Bubble period, financial analysts made relatively more optimistic
recommendations for the Internet stocks than for other stocks; this relative optimism is
specific to Internet stock and does not apply to other stocks in the high-tech sector. To
further investigate the impact of this relative optimism, I use an OLS regression to
examine whether analysts' recommendations for the Internet stocks drove the prices of
these stocks. The result suggests that analysts' recommendations have no significant
impact on the stocks' future prices. I thus conclude that although financial analysts were
relatively more optimistic for the Internet stocks, their relative optimism did not inflate
the prices of these stocks to create the Internet Bubble.
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1. Introduction
Internet stocks first went public in the early 1990s. With the success of the early
Internet initial public offerings (IPOs), such as Yahoo (1996), Amazon (1997), and eBay
(1998), an increasing number of Internet firms joined the market in the late 1990s. In
1999 and 2000 a total of 338 Internet companies went public, more than doubling the
number of existing Internet IPOs. Even more astounding than the growth of Internet
IPOs during those 2 years was the dramatic rise in share values for Internet stocks.
"During the two-year period 1998-1999, returns on an Internet index (INTDEX)
compiled by Pegasus Research International exceeded 125% while the NASDAQ and
S&P 500 indices grew at 85% and 19.5% respectively" (Liu and Song, 2001). However,
the remarkable rise of Internet stocks was eclipsed by their monumental failure. Ending
the year 2000 at 361.47 and 2470.53, the Internet and NASDAQ indices dropped by more
than 19% and 51% respectively (Hiriam, 2000). This represents the biggest decline in
stock indices since the
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