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 didnt 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 pass-
throughs 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.