The Internet Downturn: Finding Valuation Factors In Spring 2000

During the spring of 2000, the Internet Stock Index declined 45% in 10 weeks. Using a sample of direct and support (infrastructure) internet firms, this paper investigates whether the stock market decline could be attributed to new disclosures over the period (earnings reports, buy/sell recommendations, analyst forecast revisions, and web-traffic measures) or to a "reassessment" of the implications of pre-existing accounting information. We find only modest evidence that the spring 2000 decline was associated with new disclosures of web-traffic statistics, earnings, earnings forecasts, or auditors' going-concern qualifications. We find that stock prices after the price decline and returns during the price drop are more significantly explained by 1999 annual report data then by new information. The traditional financial measures do not significantly outperform the explanatory power of New Economy measures when net income is used to proxy for earnings. However, when earnings are decomposed into gross profit, marketing expenses, research and development expenses and other, then the financial information significantly outstrips the non-financial information in describing Spring 2000 returns and valuations in March and May of 2000.