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The Internet Boom in a Corporate Finance Retrospective

Abstract : Soon after the World Wide Web became popular in the second half of the 1990s, many expected the Internet to lead to a major technological revolution that would fundamentally transform consumer behavior and the mode of competition among firms. The ubiquitous term the "New Economy" epitomized the widely accepted idea that new Internet-based companies and business models had the potential to supplant existing firms and industries, and that they would give rise to a period of strong economic growth. These beliefs about the Internet, and more specifically the exuberant expectations about growth rates of the new sectors and the potential prize in a winner-takes-all competition, fed a wave of broad-based economic optimism that nourished, in the period 1998-2000, a major speculative bubble, the "Internet bubble". In New York, the Nasdaq, the major high-tech stock index, more than tripled in value between October 1998 and March 2000. The backlash was equally dramatic, with the Nasdaq index losing more than 75% in the following two years, and perhaps even excessive, considering that it subsequently increased by more than 80% from October 2002 to April 2004. With the Nasdaq index in April 2004 still accounting for only 40% of its peak value, it firmly looks today as if March 2000 marked indeed the peak of a speculative bubble. In the bubble period, there was a widespread belief among venture capital investors and financial markets that the economics of Internet-based networks would convey formidable market power to successful Internet start-ups.
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Submitted on : Sunday, December 2, 2012 - 5:27:34 PM
Last modification on : Thursday, January 11, 2018 - 6:19:31 AM

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Ulrich Hege, Sébastien Michenaud. The Internet Boom in a Corporate Finance Retrospective. E. Brousseau, N. Curien (Eds). Internet and Digital Economics, Cambridge University Press, pp. 142-170, 2007, ⟨10.1017/CBO9780511493201.004⟩. ⟨hal-00759763⟩

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