...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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...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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...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 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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...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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...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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...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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...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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...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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...Case Study: Dot-com Crash 1) * Venture Capitalists: * Discern between good and bad business ideas and entrepreneurial teams. * Monitor and guide their portfolio companies into a profitable well-managed company. * Investment Bank Underwriters * Provide advisory financial services to private companies who wish to proceed with an initial public offering. * Price offerings * Underwrite shares * Introduce profitable well-managed companies to investors to help companies raise funds and recommend sound investments to investors. * Sell-Side Analysts * Follow 15 to 30 companies in an industry * Form relationships with management * Follow trends in the industry * Making buy or sell recommendations * Market their research to the buy-side to provide support during a company’s IPO process. * Buy-Side Analysts and Portfolio Managers * Buy-side analysts need to convince portfolio managers within their company to follow their recommendations * Portfolio managers make the decision to buy or sell securities. * Accounting Firms * Audit financial statements of public companies to verify accuracy and freedom from fraud * FASB * Regulatory body that is supposed to establish and improve standards of financial accounting and reporting for the users of financial information. 2) * Venture Capitalists * Substantial percentage of net worth tied up in...
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...news, and to do shopping. The upcoming of possibilities through the internet also led to irrational decisions brought on by greed from investors that made way for the Dot Com Bubble. History of Internet A pioneer of the creation the internet was Tim Berners-Lee. Though the internet didn’t become wide spread until the early 1990s the making of the World Wide Web can be traced back into the 1980s. Berners-Lee tried to sell his creation to the company that he was working for in Switzerland, but they were slow to acknowledge his efforts.(Griffin, 2000) With that Berners-Lee turned to the internet community in 1991 making his World Wide Web browser and web server software available. (Griffin, 2000) Many enthusiasts began setting up their own web servers around the world. Many scientists were already using the internet to share information found it easier to post their information on the web and wait for a reply. With some government agencies having the responsibility to make their information public were easily able to now with the public turning to the web also. With the growth and the success of the web within a few years Berners-Lee grew concerned that the web would lead to a deconstructive competition. (Griffin, 2000) The Bubble A period of time between 1995 and 2001 is referred to as the “dot-com bubble,” with the hype and peak of NASDAQ...
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...rising profits. I will discuss the change in consumer demand for products from the tech companies after the DOT COM bubble burst and will also use examples as needed. Also discussed in this paper will be a few examples that multinational corporations can use to leverage the growing consumer demand for their products. Assignment 5: Financial Management Due Week 10 and worth 190 points Using the WileyPlus resources, go to the “How News Lifts – or Sinks – World Stock” example. http://edugen.wiley.com/edugen/courses/crs6266/boone9780470531297/c16/media/Interactive_Case_Study/ch16_case_study_new/CaseStudy2.html Create a ten to fifteen (10-15) slide PowerPoint presentation (be creative). Be sure to use the speaker notes for the details. 1. Select two (2) tech stock companies that attempted to make profits from rising consumer demand after the crash. Analyze how they attempted to make a profit after the crash and discuss any unethical practices. After the DOT COM boom, there were a number of companies that emerged that investors thought would make them a lot of money. Some Dot Com companies managed to boom and stay afloat and most of them went right on down the internet pipeline. Billions were poured into these companies in hopes that their stocks would race to the skies. Low and behold, their stocks plummeted, leaving millions of investors broke and dozens of Dot Comers and CEOs bankrupt. There are few companies that were developed in the boom of the bubble and came...
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...Mini Research Paper: Internet Bubble Fundamentals of E-Commerce Professor: Russell Calhoun Precious Harper Table of Contents Introduction…………………………………………………………. 3 Brief Description of WWW and Internet …………………………… 4 Successful Dot.com companies……………………………………… 5 Unsuccessful Dot.com companies…………………………………… 6 Conclusion……………………………………………………………. 6 Work Cited…………………………………………………………… 7 British engineer Tim Berners-Lee developed the world-wide-web in 1989; the World Wide Web became available publically on August 6, 1991. The world-wide-web is a system of resources that allows people to view and interact with a variety of information. A computer that is connected to the Internet can access the world-wide-web. Many people believe the Internet and the World-Wide-Web are one in the same when in-fact they are not. The Internet is a massive network of networks; it connects personal computers, mainframes, cell phones, GPS units, music players etc. The Internet started in the 1960’s and it’s a massive hardware combination of millions of personal, business and government computers all connected like roads and highways. The world-wide-web (WWW) is a system of Internet servers that support specially formatted documents. The documents are formatted in a markup language called Hypertext Markup Language (HTML) which supports and links documents, graphics, video and audio files. Web...
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