IESE Research Papers
No D/599:
U.S. public and private venture capital markets, 1998-2001: A fundamental information analysis
Chris Armstrong, Toni Davila ()
, George Foster and John R.M. Hand
Abstract: Systematic analysis of U.S. capital markets reveals
important empirical facts that analytical modeling or empirical research
seeking to explain the 1998-2001 movements needs to recognize. There is no
single "bubble point" at which U.S. capital markets had an epiphany that
valuations required a sharp downward re-evaluation. Rather, different
sectors had different points after which ex post sustained declines
occurred. For the NASDAQ/NYSE/AMEX public capital markets, the sustained ex
post declines occurred starting in March 2000 for the computer software
industry and in September 2000 for the computer hardware industry. Private
venture capital investment in new ventures peaked in the March 2000 quarter
for software and in the September 2000 quarter for hardware and
communications. Four sectors exhibiting extreme price movements are
identified - computer hardware, computer software, telecommunications, and
biotech/pharmaceuticals. These sectors had observable characteristics prior
to 1998 that implied higher risk - they had higher relative risk (CAPM
beta), higher standard deviation of security returns, more extreme revenue
growth increases (decreases) in the upper (lower) tails, and a higher
propensity for negative net income. During the 1998-2001 period, companies
in these sectors had abnormally high revenue growth rates. An Internet
sample of companies exhibits even higher abnormal revenue growth rates
relative to either prior periods or other companies in the 1998-2001
period. The large relative increases and decreases in the market
capitalization of U.S. capital markets in 1998-2001 may well have more
grounding in risk-reward asset pricing theory than many commentators have
recognized.
Keywords: capital markets; stock prices; Internet stocks; stock market bubble; (follow links to similar papers)
57 pages, July 21, 2005
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