An Analysis of the Performance of Initial Public Offerings in the High-Flying Internet Industry
Finkle, Todd A., French, Dan W., Journal of Business and Entrepreneurship
This study fills a gap in previous research by examining whether underpricing occurs in the after-market for the entire population of Internet initial public offerings (IPOs). Results indicate that the mean first day and first week returns (excluding the first day) for an Internet firm was 80.5 percent and-1 percent. The first day market-adjusted returns using the NASDAQ and S&P 500 Indexes as benchmarks were 83.4% and 83.3%. The first week market-adjusted returns were -2% and -1%.
AN ANALYSIS OF THE PERFORMANCE OF INITIAL PUBLIC OFFERINGS IN THE "HIGH FLYING" INTERNET INDUSTRY1
The Internet industry has received an enormous amount of publicity due to its dynamic growth. The amount of online sales in 1998 was $8 billion; however, Forrester Research, a research firm that focuses on the Internet industry, estimates that the amount of goods and services that will be sold over the Internet by 2001 will be $142 billion (Roth, 1999). The emerging Internet industry is having a dramatic effect on the competitive landscape of business today.
The Internet is part of electronic commerce (e-commerce). Kestenbaum and Straight (1996) define e-commerce as the integration of e-mail, electronic funds transfer, EDI (Electronic Data Interchange) and similar techniques into a comprehensive electronic-based system of business functions. Other authors (Kalakota & Whinston, 1996) define e-commerce as a modern business methodology that addresses the needs of organizations, merchants, and consumers to cut costs while improving the quality of goods and services and increasing the speed of service delivery. Nath, Akmanligil, Hjem, Sakaguchi, and Schultz (1998) assert that e-commerce involves the buying and selling of information, products, and services via computer networks today and in the future via any one of the myriad of networks that make up the Information Superhighway.
The Internet is a global mix of interconnected computer networks using the Internet Protocol (IP) to communicate with each other (Margherio, Henry, Cooke, Montes, & Hughes, 1998). The Internet, or Net, compromises of several data networks with hundreds of applications such as the World Wide Web and e-mail that run through these networks.
The investment community realizes the unlimited potential of the ecommerce industry. Evidence of this can be seen by the high amount of speculation that has been occurring in the after-market for Internet IPOs. For example, in 1998, Theglobe.com http://Theglobe.com sold 3.1 million shares of common stock at $9.00/share. By the end of the first day of trading the company's share price was $63.50, a 606% increase. This indicates a loss of $169 million to the company.
When the stock price of a company such as Theglobe.com increases that dramatically in the after-market, what is known as underpricing results. Underpricing occurs when the offering price for a stock is below the price for which the stock trades subsequently in the after-market (Bruton & Prasad, 1997). This area of research has been receiving increasing attention in the entrepreneurship literature (Bruton & Prasad, 1997; Prasad, Vozikis, Bruton, & Merikas, 1995).
The purpose of this study is to examine whether the phenomenon of underpricing exists within the Internet industry. Prior research has found evidence of underpricing for the general population of initial public offerings. However, little research has been performed on specific industries. This study will also examine the characteristics of Internet IPOs at the time of their initial offering (e.g., organizational age, net sales, net income, total assets and initial offering size).
This study fills a gap in previous research by focusing on the emerging Internet industry. Specifically, this study examines the underpricing phenomenon for the entire population of Internet firms that have made initial public offerings. The following research question will be answered in the study: Does the underpricing phenomenon occur within the Internet industry? …