Dotcom Mania ; The Rise and Fall of Internet Stock Prices

Wealth Management And Behavioral Finance DotCom Mania : The Rise and Fall of Internet Stock Prices

NAMA : SILVIANA ISYANTO NIM : 000000 26560 DOSEN : Dr. Kim Sung Suk, BA. M.Sc.

MAGISTER MANAGEMENT FINANCE 73 2017

DotCom Mania : The Rise and Fall of Internet Stock Prices Issue:  1998-2000 Internet sector returns over 1000%  6 % of the market cap of all U.S public companies  20 % of all publicly traded equity volume Theory/ Premise:  Emperical support to the impact of short sale restrictions on stock prices in a setting with heterogeneous investors.  Asset prices are equilibrium determined, however short sale restrictions force pessimistic investors out of the market. Research purposes : 1. Existence of relevant short sale restructions for Internet stocks. 2. Sufficient heterogeneity across investors. The Data :  January 1998 to February 2000  400 companies in pure internet sectors

Short Sales Constraints: Capital didn’t sufficient get deployed against the internet sector to keep prices down because : 1. Investors were unwilling to shorts stocks Sufficient evidence show mutual funds almost never short and hedge funds avoid risk adjusted excess return trades in highly volatile setting. 2. Investors were unable to short stocks - Very high short interest in internet shares (suggest saturation) - Lower rebate rates (1.08% less than non-internet shares) shows internet shares had reached a limit in their short positions. - Put-call parity violations : Call – Put + PV(K) = S find that 36% of internet options violate the bound, while 24% for non- internet. Implies many more arbitrage violations for internets. Heterogeneity  Data shows volume was high and participants were retail investors rather than institutions. Many mutual funds for internets were passthroughs to retail.  More retail investors were in market than under normal conditions – leading to overly optimistic beliefs.  Large responses to event driven information such as first day of IPO and end of ‘quiet period’ – when research coverage offloads shares to public (i.e. a 1 standard deviation decrease in block trading result in 30% increase in IPO first day price). Lockup Expiration as Application of theory  Lockup expiration is lifting of short sale constraint 1. Permanent shift in amount of available shares

2. Shift to class of investors who have different beliefs 3. Members of new class are potential sellers  34% fall in stock price relative to the Internet Index The Buble Bursts  Support for bubble is driven by combination of overly optimistic investors and momentum traders,  Latter part of 1999 and spring of 2000 saw a huge number of lockup expirations.  Almost $300 billion unlocked in short time.  New class of sellers overwhelms the Optimistic ones.  Insider selling continues at high level for 6 months.  Firms were also issuing new shares – peaking in March – April 2000  Momentum investors say good bye.