1. Was Speculation the Main Driver of the Rapid Rise in Technology Stock Prices?
From mid-1990s, escalated internet popularity - due to the innovation of the browser - led to optimistic expectations by investors in support of emerging “.com” domain companies. Fundamental company analysis was overlooked despite price-to-earnings ratios signalling that more than 40% of dot-com companies were overvalued. Dhar and Goetzmann stated that many investors confessed to being aware of equity overvaluations but continued to acquire stock in anticipation that share prices would rise further. The speculative bullish investment beliefs, which were inconsistent with the efficient market hypothesis, drove demand for stocks and boosted prices. During 1980-2000, even though dividends and earnings annually displayed a slow rate of increase, the S&P 500 Index rose by 1239%.
Soaring Speculation
The Taxpayer Relief Act of 1997 heightened speculation as reduction of capital gains tax rate by 8% increased availability of investment funds in technology start-ups which had little indication of profitability potential. Soon stocks’ initial public offering prices tripled or quadrupled.
In 2000, the Super Bowl advertised 17 technology companies enforcing the slogan “Get Big Fast”. Traffic growth to these websites enhanced which momentum traders wrongly viewed as a measure of future company success to speculate further. Investment surged and in the same year the technology-dominated NASDAQ Index reached its peak of over 5,000.
Solely Speculation?
Along with speculation, marketability, money and credit - the other elements of the “bubble triangle” - contributed to the rising stock prices. The marketable securities with characteristics of high liquidity and tradability strengthened investors false perception that the technology stocks were of low risk. Abundant money and credit, by venture capitalists fuelling money into the internet-based companies and also by the low interest rates in the late 1990s, led to greater amounts of funds for investing thus ultimately rising stock prices.
In conclusion, speculation was rampant amongst investors who lacked proper due diligence and were eager to invest in start-up dot-com companies in the hope of profitability. Stock prices rose primarily from speculation but it must be recognised that marketability, money and credit were also influential factors.
