GROWTH OPPORTUNITIES, STRATEGIC SAVINGS, AND THE DOT-COM BOOM AND BUST

Nathaniel Arnold and Jihad C. Dagher

Economic Inquiry, 2015, vol. 53, issue 4, 1850-1871

Abstract: type="main" xml:id="ecin12222-abs-0001"> Data from the dot-com boom-bust episode suggest that growth opportunities played an important role in explaining firms' financing strategy during this understudied episode. The low leverage of this sector was mainly driven by high growth firms which increased their leverage following the crash despite suffering a much larger fall in their market value. We present a parsimonious dynamic firm financing model where growth opportunities alone can generate the heterogeneous patterns in the financing and performance between high and low growth information technology firms prior to and following the market crash. The calibrated model also sheds light on the role played by monetary policy during that episode. ( JEL G32, E22, E5)

Date: 2015
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