|
Chapter 17 The New Economy: Pricing of Equity Securities This chapter discusses how and why stock prices were set and changed across time and firms during the “new economy” period, defined to be 1995–2001. The focus is on U.S. Internet firms because their large, rapid, and strategic spending on branding, information technology, personnel, and research and development intangibles made them the archetype of new economy businesses. Two main conclusions emerge. First, many aspects of the underlying economics of intangibles are reflected in the stock prices of Internet, biotechnology, and other intangible-intensive new economy firms. Second, the experience of many new economy companies suggests that stock prices can diverge from the rational values implied by their underlying business fundamentals for significant periods of time, particularly when the firm is intangible-intensive. The sustained nature of this mispricing was likely a combination of short-selling constraints, the incentives faced by managers to hype their stock due to the extraordinary intensity of stock options in their compensation packages, day traders, and unsophisticated investors who rarely if ever looked at the business fundamentals of the Internet and other new economy company stocks that they bought. |