The Dotcom Bubble and Underpricing: Conjectures and Evidence

Antonio Gledson de Carvalho, Roberto Pinheiro and Joelson Oliveira Sampaio

No 1633, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: We provide conjectures for what caused the price spiral and the high underpricing of the dotcom bubble of 1999?2000. We raise two conjectures for the price spiral. First, given the uncertainty about the growth opportunities generated by the new technologies and their spillover effects across technology industries, investors saw the inflow of a large number of high-growth firms as a sign of high growth rates for the market as a whole. Second, investors interpreted the wave of highly underpriced IPOs as an opportunity to obtain gains by investing in newly public companies. The underpricing resulted from the emergence a large cohort of firms racing for market leadership. Fundamentals pricing at the IPO was part of their strategy. We provide evidence for our conjectures. We show that returns on NASDAQ composite index are explained by the flow of high-growth (or highly underpriced) IPOs; the high underpricing can be fully explained by firms? characteristics and strategic goals. We also show that, contrary to alternatives explanations, underpricing was not associated with top underwriting, there was no deterioration of issuers? quality, and top underwriters and analysts became more selective.

Keywords: Internet bubble; underpricing; spinning; analyst lust; risk composition hypothesis (search for similar items in EconPapers)
JEL-codes: G14 G24 L1 O33 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2016-12-21
New Economics Papers: this item is included in nep-mkt
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Working Paper: Dotcom bubble and underpricing: conjectures and evidence (2017)
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