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AFSAH ANJUM 1301444(BBA)
DOT
COM
A stock market bubble fueled by the rise of the Internet
and the technology industry. The bubble was caused by
Bubble
the growth of Internet users and investors poured in
money to finance start-up Internet based companies
without any caution as to whether these companies can
turn a profit or not. WhenBurst
the dotcoms failed to report a
profit, the bubble burst which triggered a mild economic
recession.
History of dot com 2000:

During the late 20th century, the name ‘Dot-com’ Economy,’ which refers to the commercial
websites that characterized so many of these companies, was born as a term to identify
companies featuring internet domain names ending with “.com, the Internet created a euphoric
attitude toward business and inspired many hopes for the future of online commerce. For this
reason, many Internet companies (known as “dot-coms”) were launched, and investors assumed
that a company that operated online was going to be worth millions.
But, obviously, many dot-coms were not rip-roaring successes, and most that were successful
were highly overvalued. At its peak, even companies which had never made any revenue were
pushed onto the stock exchange and were trading at extremely high values when one looked at
the bottom lines of these companies. . As a result, many of these companies crashed, leaving
investors with significant losses. In fact, the collapse of these Internet stocks precipitated the
2001 stock market crash even more so than the September 11, 2001 terrorist attacks.
Consequently, the market crash cost investors a whopping $5 trillion.
Bubble creation process:

An economic bubble exists whenever the price of an asset that may be freely exchanged in a
well-established market first soars then plummets over a sustained period of time at rates that are
decoupled from the rate of growth of the income that might reasonably be expected to be realized
from owning or holding the asset.
Factors responsible for dot com bubble:

Considering the U.S. stock market's "Dot Com Bubble" really began in April 1997 and ended in June
2003, we should have addressed two key questions about the event:
1. What caused it to begin?

a. Encouragement of media:
American publications such as Forbes and the Wall Street Journal encouraged the public to invest
in risky companies despite many of the companies’ disregard for basic financial and even legal
principles (Lowenstein, 2004). Buffett (2000) says “Equity investors currently seem wildly
optimistic in their expectations about future returns.” However, not only can the media be argued
to have caused the huge growth of investment, but it can, according to Niederhoffer and Kenner
(2003), also be attributed to its demise. They speak in particular about Alan Green’s “irrational
exuberance” speech in December 1996 setting of a chain of events that leads to an eventual
“reaction against technology, optimism, and growth”.
b. Fascinating success of Amazon and EBay:
Since its inception in 1994, Amazon has baffled investors and business theorists with its
unconventional business model. The company pushed for massive growth with seemingly no
profit at all. The idea was simple - "Get large or get lost". Even with absolutely no profit (in
fact it had reported a loss of $3 million for the quarter preceding the IPO), it went in for an IPO
in 1997, which was hugely successful. EBay too, which was considered a company having no
value-based product to offer, had a great IPO run in 1998. During this time, Amazon stock value
had literally doubled in a span of a few weeks.
2. What caused it to end (burst)?
a. “Get Big Fast” belief:

The coining of the “Get Big Fast” belief started during the dot-com era. The initial start-ups
operated with a short-term loss business plan, insisting that by grabbing the market share
and dominating their specific sectors they could then charge what they wanted at a later
date. Recent research (Goldfarb, Kirsch and Miller, 2006) suggests that many companies
would have had better success targeting smaller niche markets. In addition, they say that
the “Get Big Fast” belief drove investor behaviour during the period leading to more stocks
bought and companies became overpriced.
b. The Use of Metrics That Ignored Cash Flow:

Many analysts focused on aspects of individual businesses that had nothing to do with how they
generated revenue or their cash flow. For example, one theory is that the Internet bubble burst
due to a preoccupation with the “network theory,” which stated the value of a network increased
exponentially as the series of nodes (computers hosting the network) increased. Although this
concept made sense, it neglected one of the most important aspects of valuing the network: the
ability of the company to use the network to generate cash and produce profits for investors.
c. Significantly Overvalued Stocks.
In addition to focusing on unnecessary metrics, analysts used very high multipliers in their
models and formulas for valuing Internet companies, which resulted in unrealistic and overly
optimistic values. Although more conservative analysts disagreed, their recommendations were
virtually drowned out by the overwhelming hype in the financial community around Internet
stocks.
d. Corporate Corruption:
The corporate corruption is believed to be a major reason for the crash to occur. Lots of
multinational companies had been drawing profits by engaging in illegal means and frauds. The
accounts that they maintained had serious loopholes and the debts were not shown. The stock
options that the officers took worked towards diluting the companies.
e. Unprofitable Business Models:
The excitement over the commercial possibilities of the internet was so big that every idea which
sounded viable could fairly easily receive millions of dollars’ worth of funding. The basic
principles of investment theory with regard to understanding when a business would turn a
profit, if ever, were ignored in many cases, as investors were afraid to miss out on the next big
hit. They were willing to invest large sums in companies which did not have a clear business
plan.
After effects on the economy:

 Stock Market Crash:
The 2000 stock market crash resulted in a loss of almost $8 trillion of wealth. The illegal
means and frauds, serious hidden loop holes and over evaluation of the stocks caused the
stock market to crash. As per the records of September 1st 2000 of NASDAQ, the trading
was at 4234.33. The fall started after that and by January 2nd 2001 there was a drop of 45.9%
and the NASDAQ was now trading at
2291.86.
 Careful Future Investments:

After the crash, both companies and the
markets have become a lot more cautious
when it comes to investing in new
technology ventures.
 Companies went bankrupt:

The effects of the bubble bursting were that several companies went bankrupt. An example is
WorldCom who admitted to billions of dollars of accounting errors (Tran, M., 2002), and as
a consequence the stock price fell so drastically they had to file for bankruptcy. Many other
struggling companies became acquired or merged with other companies.
 Capital market fluctuation:

The investment bond market was badly hit by the bursting of the dot com bubble in the early
noughties and has been in perpetual decline ever since – in 2002.
 New stock trading rules were made:

To see that just about anyone doesn’t jump into stock trading a rule was formed for these
Day traders. Going by these rules, an individual had to have a minimum of $25000 to their
name in any bank account. That would ensure that the person is not insolvent. Other than this
very basic rule, lots of other rules were laid which could restrict the previous marketing
methods which led to losses.
 Shifting ‘Dotcom’ from company’s name:

Many companies changed their names to remove any association as a dotcom company.
Cooper et al. (2005) mention how during the bear market of the early 2000s “investors react
positively to name changes for firms that remove dot.com from their name”.
 Rule of CEO and CFO accountability:

Under these regulations all the statements needed to be duly signed by the CEOs or CFOs of the
respective companies. That way frauds and loopholes could easily be made out. Also the
prosecution was made stricter. The penalties that would result from frauds or any illegal activity
in trading were increased. This was meant to control the losses that the market was suffering.

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AFSAH ANJUM 1301444(BBA)

History of dot com 2000:

Bubble creation process:

Factors responsible for dot com bubble:

1. What caused it to begin?

a. “Get Big Fast” belief:

b. The Use of Metrics That Ignored Cash Flow:

After effects on the economy:

 Careful Future Investments:

 Companies went bankrupt:

 Capital market fluctuation:

 New stock trading rules were made:

 Shifting ‘Dotcom’ from company’s name:

 Rule of CEO and CFO accountability:

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