Economics & Finance / Finance & Investment / Stock & Capital Markets

The Dot Com Mania-sustained highs, and eventual collapse of internet stock prices in the late 20th

DotCom Mania: The Rise and Fall of Internet Stock Prices

This research paper, titled "DotCom Mania: The Rise and Fall of Internet Stock Prices," explores the economic logic behind the dramatic surge, sustained highs, and eventual collapse of internet stock prices in the late 20th century. The authors argue that this "mania" stemmed from the combined effect of heterogeneous beliefs and restrictions on short selling: when both extremely optimistic and relatively pessimistic investors existed in the market, the legal and institutional difficulties of short selling prevented pessimistic predictions from being reflected in stock prices, resulting in prices reflecting only the premium of optimists. Analysis of data from 1998 to 2000 confirms that the valuations of internet companies at that time far exceeded fundamental indicators, and that the bursting of this bubble was closely related to the end of the IPO lock-up period. With the expiration of the lock-up period, a large influx of new shares into the market introduced more pragmatic sellers, overcoming previous trading restrictions and ultimately triggering the bursting of the bubble. This paper reveals how liquidity constraints in market structure fuel irrational exuberance and provides an important empirical framework for understanding financial crises.