Financial Performance of Computer Networkand Information Technology Services Companies in Bulland Bear Markets

By Macy, Anne; Terry, Neil et al. | Academy of Accounting and Financial Studies Journal, October 1, 2011 | Go to article overview

Financial Performance of Computer Networkand Information Technology Services Companies in Bulland Bear Markets


Macy, Anne, Terry, Neil, Walker, Jean, Academy of Accounting and Financial Studies Journal


ABSTRACT

Stock market volatility has been omnipresent in the information technology sector. This manuscript compares the stock performance of computer network and information technology companies across six different twenty-month periods between the years 1996-2006. The focus periods include the browser era, the Y2K era, the post-Y2K era, the post-9/11 era, the outsourcing era and the mobile/wireless era. The lowest stock market returns are in the postY2K and post-9/11 eras for four of the five computer network and information technology services firms in the research cohort. The highest stock market returns for the five computer network and information technology services firms are in four different periods. The firms in the study show a tendency to experience high industry correlation in a bear market but little correlation during a bull market. The results imply that the computer network and information technology services industry has characteristics that are consistent with being a blockbuster instead of a commodity.

INTRODUCTION

The information technology sector has transformed the economy and changed the basis of competition (Sampler, 1998). Information technology boosts the efficiency of the decisionmaking 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, post9/1 1 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 & Osier, 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). …

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