The Value Relevance of Network Advantages: The Case of E–Commerce Firms

Shivaram Rajgopal, Mohan Venkatachalam and Suresh Kotha

Journal of Accounting Research, 2003, vol. 41, issue 1, 135-162

Abstract: We show that network advantages constitute an important intangible asset that goes unrecognized in the financial statements. For a sample of e–commerce firms, we find that network advantages created by Web site traffic have substantial explanatory power for stock prices over and above traditional summary accounting measures such as earnings and book value of equity. Also, network advantages are positively associated with one–year–ahead and two–year–ahead earnings forecasts provided by equity analysts. When we allow network advantages to be endogenously determined by managerial actions, we find that at least part of the value relevance of network effects stems from the presence of affiliate referral programs and higher media visibility.

Date: 2003
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https://doi.org/10.1111/1475-679X.00099

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