When Internet Boom Went Bust
While the internet boom lasted, nothing seemed able to deflate the bubble. Few internet and dot com companies were profitable, but investors never seemed to mind. They looked at the number of customers or subscribers as the basis for valuing internet stocks. The name of the game became raising capital, not making profits. Even when fashionable stocks dipped, there was remarkably little effect on the rest of the market. People had learned that it pays to buy the dips, and were not weaned from the habit until it ceased to pay.
Now that internet fever has abated, we hear that the “fundamentals” are reasserting themselves. But this view is as much a half-truth as the previous notion that the boom would last forever because the internet economy had created new fundamentals. Indeed, the internet boom/bust cycle brings into question prevailing economic theories about financial markets.
What should now be clear is that the so-called fundamentals that supposedly determine stock prices are not independently given. Instead, they are contingent on the behavior of financial markets. There are, indeed, myriad ways in which stock prices affect the fortunes of companies: they determine the cost of equity capital; they decide whether a company will be taken over or acquire other companies; stock prices influence a company’s capacity to borrow and its ability to attract and reward management through stock options; stock prices serve as an advertising and marketing tool. In other words, when financial markets believe a company is doing well, its “fundamentals” improve; when markets change their mind, the actual fortunes of the company change with them. Moreover, changes in financial markets also have far reaching macroeconomic consequences.
To continue reading, register now.
Already have an account? Log in