...ACCT 311 Dot-Com Crash 2000 Ting Hu Bradley Bromelow Austin Person 1.What is the intended role of each institutions and intermediaries discussed in the case for the effective functioning of capital markets? There is an information gap between investors and companies. Investors usually do not have enough information or expertise to determine the good investments from the bad ones. And companies do not usually have the infrastructure and know-how to directly receive capital from investors. Intermediaries include accountants, lawyers, regulators, investment banks, venture capitalists, and money management firms. Venture Capitalists provide capital for companies in their early stages of development. They sought to provide a very high rate of return for their investors for the associated risk. This was accomplished by selling their stake in their portfolio companies either to the public through an IPO, or to another company in a trade sale. Entrepreneurs in the actual process of doing an initial public offering rely upon investment banks. Investment banks provided advisory financial services, helped companies price their offerings, underwrite the shares, and introduce them to investors. Sell-side analysts’ main function was to public research on public companies. Their job involved forming relationships with and talking to the managements of the companies, following trends in the industry, and ultimately making buy or sell recommendations on the stocks. The recommendations...
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...The Role of Capital Market Intermediaries in the Dot-Com Crash of 2000 1. What is the intended role of each of the institutions and intermediaries discussed in the case for the effective functioning of capital markets? a. Venture Capitalists Because they invest the capital for new established companies which contain lots of uncertainties, venture capitalists require high rate of return from their investments. The main role of VC firms is fostering newly organized companies which are in the portfolio to be fully functioned and well organized by monitoring and guiding them before going public. b. Investment Bank Underwriters Investment banks give financial advices to companies which are under actual processing of IPO such as setting prices their offerings, underwriting the shares, and gathering the investors. c. Sell-side Analysts Their main role is doing research on public companies and releasing the results. The results is ultimately making a decision to sell or buy the shares of each public company by organizing the relationships with 15 to 30 companies in a certain field and interviewing with managements of the companies under current trend of that industry. Furthermore, sell-side analysts assist the company which is under the process of IPO by providing their research to the buy-side before going public. d. Buy-side Analysts and Portfolio Managers Buy-side analysts usually do research on companies in a certain industry such as interviewing with managements, forecasting...
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...CASE STUDY: THE ROLE OF CAPITAL MARKET INTERMEDIARIES IN THE DOT-COM CRASH OF 2000 Question 1 Venture Capitalists: The intended role should be to fund effectively picked out unlisted growth companies with promising business ideas and talented value driven management teams from those companies that do not reflect these characteristics. As VC’s typically encounter high risk upon investing, they also demand a high return that often comes in the form of a sell out of shares after an IPO. Putting a lot of effort on sustaining the key characteristics of the firm is therefor valuable for the VC’s as the publics view on the firms quality determines the return generated. Investments bankers: Assist unlisted companies in introducing them to the public in an initial public offering, thereby including good and profitable financial advice to its clients, where a crucial element is to guide on when there is a good time to issue shares to the public, and when there is not. Further the investment banker price the offerings, underwrite the shares and marketing the companies to the investors. The main point is to help getting a fair deal for the client. Sell-side analysts: Gather information on public firms to write investment research that will be distributed to clients. These tasks include forming relationships frequent dialogs with the management of public companies and come up with buy or sell recommendations based on the analysis and trends in the market. Buy-side analysts...
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...Dot-Com Bubble Table of Contents Abstract ................................................................................................................................................... 3 Introduction ............................................................................................................................................. 4 Causes ..................................................................................................................................................... 4 Effects ..................................................................................................................................................... 5 Lessons learnt.......................................................................................................................................... 7 Conclusion .............................................................................................................................................. 7 Appendix ................................................................................................................................................. 8 Reference List ......................................................................................................................................... 9 Abstract This report presents an analysis of a stock market bubble, well known as “dot-com bubble”, which developed roughly during a period from 1995 to 2000, and ended up in 2001. The report discusses...
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...The Dot com boom/bust An economic bubble exists whenever the price of an asset that may be freely exchanged in a well-established market first soars to levels that cannot be justified (Ironman, 2010). ‘Investors’ push the price of the asset up by irrationally purchasing it. Eventually, the market realizes that the asset price is unjustified and the bubble bursts. More often than not, the bust happens in an all-of-a-sudden manner resulting in people losing huge sums of money. At the same time, these boom/ bust cycle has its beneficiaries, institutions and individuals who make huge amounts of money by ‘surfing’ the bubble or by fuelling it. In the case of the dot com boom, the culprits were the investment banks and some venture capital firms. Events leading up to failure One of the issues that I believe to be partly responsible for the dot com boom happened when the Taxpayer Relief act of 1997 lowered the maximum tax rate on capital gains for individual investors from 28 percent to 20 percent for assets held for more than 18 months. This perspective, proposed by Zhonglan Dai, Douglas A. Shackelford and Harold H. Zhang. In “Capital Gains Taxes and Stock Return Volatility: Evidence from the Taxpayer Relief Act of 1997“highlighted the fact that non- and lower dividend paying stocks experienced a larger volatility than high dividend-paying stocks. Stock volatility was substantially higher after 1997 and this may have contributed to the inflation of the bubble. It was not the main cause...
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...The dot-com bubble that occured in the 1990's through the early 2000's was said to have left some major negative impressions on the world of the internet and our economy, but that is not necessarily true. Because of the dot-com bubble, there have been many great outcomes that often goes unnoticed before looking past all of the businesses and internet companies that went under when this bubble finally burst in the early 2000's. In fact, many say that the dot-com bubble and burst was actually a needed cause and effect that has shaped the internet into what it now is today. Many people believe that a lot of the websites that existed during the dot-com bubble would have had some sort of success if it wasn't for the network infrastructure at the time. The thing is, not many people didn't have access to broadband and the websites weren't getting the exposure and full potential that it could have received. This is especially true for some websites, such as Broadcast.com (Altucher Confidential, 2011). This very same thought occurred during the dot-com bubble and computer scientists and engineers realized that there was a very much needed improvement to the infrastructure of the internet. In order to correct this, many businesses in the tech industry began using tax money to lay high-speed fiber optic cables so that the internet would be more accessible in certain cities and states. This is probably one of the most beneficial things that came about from the dot-com bubble because...
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...The Dot-Com Crash 1. What is the intended role of each of the institutions and intermediaries discussed in the case for the effective functioning of capital markets? Venture Capitalists VCs have several intended roles in order for capital markets to function effectively. First of all, VCs provide needed financing for startup companies and, also, build strong platform for further financing. Since it is difficult for new companies to raise capital in public markets, VCs are necessary intermediaries. Another role of VCs is to determine good business models and ideas worth investing from bad ones. They need to identify startups that have high potential to become great solid companies and provide high returns for their investors. Therefore, most venture capitalists are savvy professionals with the backgrounds in corporate finance, investment, and management. Investment Bank Underwriters Main role of investment bank underwriters is to provide their expertise and financial services, such as price IPO or underwrite shares, when a company wants to go public. In addition, since most investment banks are well-known institutions with good reputations they play significant role in introducing new companies to investors. Sell-Side Analysts As the name speaks for itself, the central focus of these intermediaries is to conduct and then publish research on public companies. A sell-side analyst closely studies a company of interest and based on his or her findings makes...
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...This PDF is a selection from a published volume from the National Bureau of Economic Research Volume Title: G7 Current Account Imbalances: Sustainability and Adjustment Volume Author/Editor: Richard H. Clarida, editor Volume Publisher: University of Chicago Press Volume ISBN: 0-226-10726-4 Volume URL: http://www.nber.org/books/clar06-2 Conference Date: June 1-2, 2005 Publication Date: May 2007 Title: The Dot-Com Bubble, the Bush Deficits, and the U.S. Current Account Author: Aart Kraay, Jaume Ventura URL: http://www.nber.org/chapters/c0124 11 The Dot-Com Bubble, the Bush Deficits, and the U.S. Current Account Aart Kraay and Jaume Ventura 11.1 Introduction Since the early 1990s, the United States has experienced steadily widening current account deficits, reaching 5.7 percent of gross national product (GNP) in 2004 (see top panel of figure 11.1). These deficits are large relative to the postwar U.S. historical experience. With the exception of a brief period in the mid-1980s where current account deficits reached 3.3 percent of GNP, the U.S. current account has typically registered small surpluses or deficits averaging around 1 percent of GNP. As a consequence of the recent deficits, the U.S. net foreign asset position has declined sharply from –5 percent of GNP in 1995 to about –26 percent by the end of 2004 (see bottom panel of figure 11.5). The goal of this paper is to provide an account of this decline that relates it to other major macroeconomic events and helps us to...
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...dit NMIMS | The World .com fall - IT Bubble burst | | Poleswar Rao V | | INTRODUCTION The dot-com industry began in the early 1990s as a collection of startup companies using the Internet as their primary means to conduct business. These companies typically used the “.com” suffix in their company names, such as Amazon.com, and proliferated in the late 90’s with the massive investments in Internet-related stocks and enterprises. But with the failure and consolidation of many of these companies their numbers have since dwindled. The catastrophic collapse of the dot-coms that shook the U.S. economy started in May 2000. More than 210 dotcom companies failed in 2000 and a total of 762 dot-coms closed for the period January 2000 to December 2001. Since many of these dot-coms began to lay off their staff, the unemployment rate also increased from 3.9% to 6% by 2002. The dot-com bubble burst because the boom was based on the false premise that new technology would eliminate the need for brick-and-mortar stores as this new business model would supplant the old one, thereby converting the “Old Economy,” which is based on the production of physical goods into a “New Economy,” which is based on heavy use of information and communication technology. Although a great deal can be learned from examining the dot-com successes, it is equally important to study reasons for the failures. Examining the mistakes made by the dot-coms can provide insight into the evolution of e-commerce...
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...Dot.com Bubble Christopher Smirnes Professor: Dr. D The Dot.com bubble, otherwise known as the Dot.com boom was one of the most significant events in the Internets history. It brought upon millions upon millions of dollars in losses and many of these start up companies never even made a profit. The business world was flipped upside down, and a whole new world was opening up to entrepreneurs. However, since this was such a new technology, as with anything new, there are always risks. The dot.com bubble can be broken down into three different stages, the investment stage, the failure stage, and the recover stage. It all started in the early 1990’s when the Internet truly got its start. During this time period, everything was very slow and many people did not buy computers due to the extremely high cost. By the mid 90’s everything changed, and the world was going nuts over the possibilities of the Internet. Businesses and investors were part of that group that jumped right on in. With the ability to reach millions of customers with click of a button, the Internet certainly has a huge draw. Everyone was trying to get into the game and investors were dumping tons of money into all of these companies that had to essentially start from scratch. It was during this influx of cash pouring in that everything seemed perfect and profits would just go through the roof. It seemed as if everyone had a domain name and being able to access...
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...The Dot-Com Crash of 2000 Case Study 1. What is the intended role of each of the institutions and intermediaries discussed in the case for the effective functioning of capital markets? The intended role of each of the institutions and intermediaries are shown in Exhibit 10, with the idea that the overall structure and individual roles are working as a whole to facilitate the capital flow from the investors to the companies. 2. Are their incentives aligned properly with their intended role? Whose incentives are most misaligned? No. As indicated in Exhibit 10, the overall structure and individual roles are working as a whole to facilitate the capital flow from the investors to the companies. If we need to have this market operation in a "clean" way, the incentives of the intermediaries should not be directly related to the short term gains from this capital flow. However, in real life, that is not the case. The one intermediary whose incentives are most misaligned can be the money managers. Though it is true sometimes they are under pressure from "greedy" investors, it can be true that, in most of the cases, they are the one who build up the bubble (willingly or unwillingly), due to the fact that, the incentives they received are directly from their short term (e.g. quarter or annual) performance, against the market benchmark or other money managers. 3. Who, if anyone, was primarily responsible for the Internet stock bubble? My view is that, economic bubbles are part of...
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...1. What is the intended role of each of the institutions and intermediaries discussed in the case for the effective functioning of capital markets? The institutions and their roles are as below: * Venture capitalists: VC’s provide capital to high potential, high risk companies in their early stages of development. In return they seek to provide very high rate of return to their investors for the associated risk. VC’s screen for good business ideas and management teams from the bad ones. They then work closely with these management teams, monitoring and guiding them, so that the business idea is transformed into a well-managed fully functional company that can stand on its own. These companies then enter the public capital markets through an IPO providing an exit option to the VC. * Investment bank underwriters: Underwriters administer the public issuance and distribution of securities of an issuing entity. They work closely with the issuing entity and provide advisory service, price offering of the security, underwrite the shares and introduce the issuing entity to investors via road shows. * Sell-side analysts: They follow a list of companies, all usually in the same sector, and provide regular research reports to the investment bank or brokerage houses clients. These analysts provide buy or sell recommendation on stocks after studying the trends of the industry, reviewing the financial statements of the company and interacting with the management of the company...
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...Objective: To discuss the role of capital market intermediaries in the dot-com of 2000 and to check whether their incentives were properly aligned with their intended roles. Observation: This case mainly describes the dot-com bubble and discusses the underlying causes of the bubble burst. It was primarily caused due to the speculation by intermediaries such as investors, accountants, lawyers, regulatory bodies, investment banks, venture capitalists, and money management firms of the value of the rapidly growing Internet sector and e-business. These intermediaries wanted big ideas more than a solid business plan from a company. The IPOs of internet companies emerged with ferocity and frequency, sweeping the nation up in euphoria. Soon, speculators were barely able to control their excitement over the "new economy." Investors were blindly grabbing every new issue without even looking at a business plan to find out, for example, how long the company would take before making a profit, if ever. Obviously, there was a problem. Some of the analysts at the firm began to recommend companies simply because they knew that the stock prices would go up, even though they were clearly overvalued. Plenty of venture capital created an environment in which these businesses dismissed standard business models, where businesses were running on losses yet forecasted as good investments. Finally, a slowdown in e-business spending from large corporate clients prompted many analysts to downgrade most...
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...accurate and reliable. This guide is to help assess reputable websites. Surfing the WEB There is a lot of information available on the World Wide Web today. Deciphering what is accurate and creditable requires a closer look. When accessing information, these steps should be followed. First, locate the authors name, look for any credentials, locate the contact information, and what authority does the author have on this topic. Second, take note on who published the site, what links are connected to it and at the bottom of the web page look for the date of publication. Examine the domain or URL. Dot gov means a US government site, .mil means a US military site, and .edu means an accredited post secondary educational institution. Dot com means a commercial for profit site, .org means a noncommercial, not for profit entity, .net means a computer network, and .int means an international organization. Lastly, determine the sites purpose. Is it trying to sell something, persuade you, or just providing you with information. Investigating the areas will aid in evaluating websites. The author may have a PhD or be a professor but that does not make him and expert on topics not related to the field of practice or study. Taking not on the publishers helps determine the motive and correlation to the author. Looking at the date of publication helps determine how recent the information is and when last updated. Scenario and Recommendations A patient whom is 58 y/o has developed a...
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...ntroduction Since the introduction of dot.com companies in the late 90's to the way we do e-Business in today's market. Dot.com companies were a collection of start up companies selling products or service using the Internet. e-Business on the other hand is opening new avenues of collaboration in the apparel and retail industries, and companies across the supply chain. They proliferated in the late 1990's dot.com boom, a speculative frenzy of investment in Internet and Internet-related technicial stock and enterprises. The name derives from the fact that many of them have the ".com" internet top level domain suffix built into their company name. (Remember why the dot. com companies tanked?) Modell's Sporting Goods is the nation's oldest, family-owned and operated, retailer of sporting goods, sporting attire, for men, women and children wear and brand name athletic footwear. Modells.com (e-Business) currently offers a large collection of products from top name brands in the sporting goods and clothing business and has prospered from its e-business. Modell's has taken full advantage of its e-business opportunity like most of the dot.com companies but survived the rise and fall of the boom. The electronic medium (Internet) has reduced or eliminated many costs associated with doing store front business. For example: investment in real estate and facilities are reduced, and certain administrative costs related to these stores have been eliminated. Moreover, the accomplishment...
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