Academic journal article Academy of Accounting and Financial Studies Journal

Financial Performance of Computer Network and Information Technology Services Companies in Bull and Bear Markets

Academic journal article Academy of Accounting and Financial Studies Journal

Financial Performance of Computer Network and Information Technology Services Companies in Bull and Bear Markets

Article excerpt

INTRODUCTION

The information technology sector has transformed the economy and changed the basis of competition (Sampler, 1998). Information technology boosts the efficiency of the decision-making process and is perceived by many executives as an integral part of their business strategy (Molloy and Schwenk, 1995; Bartholomew, 1998). Investors have struggled to comprehend the potential and the limitations of information technology companies as the industry has continued to evolve over time. Not surprisingly, the volatility of stock prices for information technology firms has been extreme as many companies struggle to survive in the next few years after reaching a peak stock valuation. On March 10, 2000 the NASDAQ composite peaked at an intra-day high of 5,132 and declined to half of its value within a year before finding a bear market bottom on October 10, 2002 with an intra-day low of 1,108. The excessive rise and fall of information technology companies offers a unique opportunity to evaluate industry nuances associated with bear and bull markets.

The purpose of this research is to compare the stock market performance of multiple computer network and information technology services companies across six information technology eras. The six period classifications are the browser era, Y2K era, post-Y2K era, post9/11 era, outsourcing era, and mobile/wireless era. Cisco Systems (CSCO), 3Com (COMS), Ericsson (ERIC), Nortel Networks Corporation (NT), and Yahoo Inc. (YHOO) are the five computer network and information technology services firms included in the study. The organization of this manuscript divided into five sections. The first section offers a discussion on the literature related to the financial performance of information technology companies. The next section offers background information relating to the six information technology eras applied to this study. The third section discusses the computer network and information technology services industry and the five specific companies that are the focus of this study. The fourth section presents data and methodology. The fifth section puts forth results from the application of a nonparametric technique to compare stock market returns across different information technology eras for the six companies. The final section offers concluding comments.

REVIEW OF THE LITERATURE

Academic research identifying structural economic changes that influence stock prices mostly focuses on major crashes in the history of financial markets (Higgins & Osler, 1997; Allen & Gale, 2000; Cocca, 2005). Although a relatively new topic for the information technology sector, there are numerous studies in finance theory that focus on the development of speculative bubbles and stock market volatility (Camerer, 1989; Allen & Gale, 2000). Stock market volatility is explained by various approaches, which differ in essence according to assumptions made with regard to market efficiency (Sornette & Malevergne, 2001). Stock market performance of information technology companies reveals the sector has greater volatility than most other economic sectors (Demers & Lev, 2001; Ofek & Richardson, 2003; Kamssu, Reithel, & Ziegelmayer, 2003). Terry, Macy, and Abdullat (2010) find a correlation of stock prices for vertically integrated technology companies in a down market but bull markets are not highly correlated within the vertically integrated firms.

Cocca (2005) puts forth one of the few studies exploring potential reasons for the stock market volatility of information technology companies. The study uses a broad media database to analyze the informational and media environment surrounding the market highs for technology stocks and explores potential trigger events that could cause an Internet bubble to burst. Two key informational event triggers are public awareness of the human genome research results and the publication of a study by Barron's magazine about Internet companies' burn rates. …

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