Dot-Com Case Study

In: Business and Management

Submitted By sunray
Words 1085
Pages 5
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 of the companies in the sector. So dramatic was the drop in valuation of these companies that this period was subsequently often referred to as the “dot-com crash.” This crash had far reaching implications on investors, consumers and also threatened US economy into recession. Thus, demonstrating a real life illustration of what economists call the lemons problem.

Intended roles of the…...

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