THE ROLE OF THE MEDIA IN THE INTERNET IPO BUBBLEN Utpal Bhattacharya Kelley School of Business Indiana University bhattac@indiana. ed Neal galpin Kelley School of Business Indiana University galpin @indiana. edu Rina ray Kelley school of Business Indiana university riray@@indiana. edu Yu Carlson School of Management University of Minnesota yu(@csom. umn. edu ber15.2005 Key words: initial public offerings, media, internet bubble EL number: E32G14 G30 s We are grateful fo gestions from Laura Field, Murray Frank and seminar participants at Penn State Unive management University, University of New Orleans and at the followin conferences: European Finance Association Annual Meeting 2005 and China International Finance Conference 2005. All mistakes remain our own responsibility
THE ROLE OF THE MEDIA IN THE INTERNET IPO BUBBLE* Utpal Bhattacharya Kelley School of Business Indiana University ubhattac@indiana.edu Neal Galpin Kelley School of Business Indiana University ngalpin@indiana.edu Rina Ray Kelley School of Business Indiana University riray@indiana.edu Xiaoyun Yu Carlson School of Management University of Minnesota xyu@csom.umn.edu September 15, 2005 Key words: initial public offerings, media, internet bubble JEL number: E32, G14, G30 * We are grateful for suggestions from Laura Field, Murray Frank and seminar participants at Penn State University, Singapore Management University, University of New Orleans and at the following conferences: European Finance Association Annual Meeting 2005 and China International Finance Conference 2005. All mistakes remain our own responsibility
THE ROLE OF THE MEDIA IN THE INTERNET IPO BUBBLE Abstract The first part of this paper explores whether aggregate media coverage was different for internet IPOs as opposed to a matching sample of non-internet IPOs in the late 1990s. So we read all news items that came out between 1996 through 2000 on 458 internet IPOs and a matching sample of 458 non-internet IPOs-a total of 171, 488 news items-and classify each news item as good news, neutral news or bad news. We find, not surprisingly, that the overall media coverage was more intense for internet IPOs. Further. we document that the overall media coverage was much more positive for internet IPOs in the period of dramatic rise in share prices and was mucl more negative for internet IPOs in the period of dramatic fall in share prices. The second part of the paper explores whether this differential media coverage had any effect on the difference in risk-adjusted returns between internet stocks and non-internet stocks. We find, surprisingly, that the answer is no the market somewhat discounted the media sentiment -though net news (number of good news minus number of bad news) Granger caused risk-adjusted returns for both samples of IPOs, the effect was lower for internet IPOs, especially in the bubble period. So our conclusion is that the media was not a significant factor in the dramatic rise and fall of internet shares in the late 1990s
THE ROLE OF THE MEDIA IN THE INTERNET IPO BUBBLE Abstract The first part of this paper explores whether aggregate media coverage was different for internet IPOs as opposed to a matching sample of non-internet IPOs in the late 1990s. So we read all news items that came out between 1996 through 2000 on 458 internet IPOs and a matching sample of 458 non-internet IPOs – a total of 171,488 news items – and classify each news item as good news, neutral news or bad news. We find, not surprisingly, that the overall media coverage was more intense for internet IPOs. Further, we document that the overall media coverage was much more positive for internet IPOs in the period of dramatic rise in share prices and was much more negative for internet IPOs in the period of dramatic fall in share prices. The second part of the paper explores whether this differential media coverage had any effect on the difference in risk-adjusted returns between internet stocks and non-internet stocks. We find, surprisingly, that the answer is no: the market somewhat discounted the media sentiment – though net news (number of good news minus number of bad news) Granger caused risk-adjusted returns for both samples of IPOs, the effect was lower for internet IPOs, especially in the bubble period. So our conclusion is that the media was not a significant factor in the dramatic rise and fall of internet shares in the late 1990s
THE ROLE OF THE MEDIA IN THE INTERNET IPO BUBBLE L INTRODUCTION The offer price of eToys'initial public offering(IPO)on May 20, 1999 was $20. It shot up to $76.5625 at the end of the first trading day. Later, in a special report, Wall Street Journal's technology editor Jason Fry noticed that "driving the company's success is a cleanly designed, easy-to-use site designed to soothe adults rattled by the pitfall of toy shopping in the real world". He wrote: ". for many an overeager Web outfit, they [eToys] have proved hard to duplicate. The company is fanatical about providing top-rate customer service, including actual human beings who answer the telephone. It didnt open for business until founder and Chief Executive Officer Toby Lenk believed he understood the toy industry and how it should work online. And eToys is dedicated to moving at Web speed. It has stayed ahead of its deep-pocketed competitors by constantly transforming itself, for example, by diversifying its inventory to include books, music, videos and baby products. "By the end of 2000, the firm traded at 0. 1875 per share, which was 0. 24% of its first day closing price, and 0.94%of its offer price. Today, eToys does not trade. The company went bankrupt and its stock was de-listed from Nasdaq on February 26, 2001 In this paper, we use the phrase "bubble/post-bubble "to reflect the dramatic rise and dramatic fall of stock prices in the period of 1996-2000. We ask and answer the following two questions: was the overall media coverage for internet IPOs in the years 1996 through 2000 different from a matching sample of non-internet IPOs and, if yes, did this difference in the media coverage have any effect on the difference in risk-adjusted returns between internet stocks and non-internet stocks There are many reasons for believing that the media coverage and/or its effect were more pronounced for internet IPOs than for non-internet IPOs in the late 1990s. First, the media were more In this paper we look at stock returns after the first day of trading. In a companion paper, we look at stock returns at the first day of trading. The reason we separated our analysis is because the information dissemination during the pre IPO book-building stage is very different from the information dissemination during the post-IPO stage. In the pre IPO stage, institutions disseminate information and, therefore, the natures of these institutions are the significant control variables. A rich literature exists on what affects the first days return. In the post-IPO stage, on the other hand, the main source of information is the traded price itself. This, therefore, becomes the paramount control variable in this paper
1 THE ROLE OF THE MEDIA IN THE INTERNET IPO BUBBLE I. INTRODUCTION The offer price of eToys’ initial public offering (IPO) on May 20, 1999 was $20. It shot up to $76.5625 at the end of the first trading day. Later, in a special report, Wall Street Journal’s technology editor Jason Fry noticed that “driving the company’s success is a cleanly designed, easy-to-use site designed to soothe adults rattled by the pitfall of toy shopping in the real world”. He wrote: “…for many an overeager Web outfit, they [eToys] have proved hard to duplicate. The company is fanatical about providing top-rate customer service, including actual human beings who answer the telephone. It didn’t open for business until founder and Chief Executive Officer Toby Lenk believed he understood the toy industry and how it should work online. And eToys is dedicated to moving at Web speed. It has stayed ahead of its deep-pocketed competitors by constantly transforming itself, for example, by diversifying its inventory to include books, music, videos and baby products.” By the end of 2000, the firm traded at $ 0.1875 per share, which was 0.24% of its first day closing price, and 0.94% of its offer price. Today, eToys does not trade. The company went bankrupt and its stock was de-listed from Nasdaq on February 26, 2001. In this paper, we use the phrase “bubble/post-bubble” to reflect the dramatic rise and dramatic fall of stock prices in the period of 1996-2000. We ask and answer the following two questions: was the overall media coverage for internet IPOs in the years 1996 through 2000 different from a matching sample of non-internet IPOs and, if yes, did this difference in the media coverage have any effect on the difference in risk-adjusted returns between internet stocks and non-internet stocks.1 There are many reasons for believing that the media coverage and/or its effect were more pronounced for internet IPOs than for non-internet IPOs in the late 1990s. First, the media were more 1 In this paper we look at stock returns after the first day of trading. In a companion paper, we look at stock returns at the first day of trading. The reason we separated our analysis is because the information dissemination during the preIPO book-building stage is very different from the information dissemination during the post-IPO stage. In the preIPO stage, institutions disseminate information and, therefore, the natures of these institutions are the significant control variables. A rich literature exists on what affects the first day’s return. In the post-IPO stage, on the other hand, the main source of information is the traded price itself. This, therefore, becomes the paramount control variable in this paper
likely to be interested in internet IPOs, because in this period there were so many of them, and many of them had dramatic first-day returns(Benveniste, Ljungqvist, Wilhelm and Yu 2003, Ljungqvist and Wilhelm 2003 and Ritter and Welch 2003). Second, as the internet industry was new, there was no history of cash flows of comparable firms that had gone public. This made valuations difficult, and so expectations of future cash flows for internet IPOs were more likely to be sensitive to media news(Blanchard and Watson 1982, Hirota and Sunder 2002 provide experimental evidence. )Third, the limits to arbitrage were more binding for internet IPOs during the period of 1996-2000(Lamont and Thaler 2003 and Ofek and Richardson 2003), so the divergence of stock prices from their fundamental value was likely to be greater for internet IPOs. Further, institutional investors did not attempt to trade against market movements, but actively rode with both the run-up and run-down of the stock( Griffin, Harris and Topaloglu 2003 and Brunnermeier and Nagel 2004). Fourth, and finally, there is now increasing evidence that the spectacular rise and spectacular fall of internet IPOs in the late 1990s can not be reconciled with fundamentals( Cooper, Dimitrov and Rau 2001, Ofek and Richardson 2002, Loughran and Ritter 2004). A good place to begin looking for other explanations is to formally explore the economic role of the media in this period Was the overall media coverage different for internet IPOs? We read all news items that came out between 1996 through 2000 on 458 internet IPOs and a matching sample of 458 non-internet IPOs -a total of 171, 488 news items- and classify each news item as good news, neutral news or bad news. We find not surprisingly, that the media coverage was more intense for internet IPOs. All types of news-good bad, or neutral - were more for internet IPOs than for non-internet IPOs in both the bubble period and the post-bubble period. Second, we use net news(good news minus bad news) to proxy media sentiment. We find that compared to the matching sample, the net news was more positive for internet IPOs in the bubble 2 Cutler, Poterba and Summers(1989) is one of the early papers that show stock return variances cannot be caused by fundamental news such as macroeconomic news s Shiller(2000) believes that the stock price increases in the late 1990s were driven by irrational euphoria among individual investors, fed by an emphatic media, which maximized TV ratings and catered to investor demand for pseudo-news. Professional investors"are not immune from the effects of the popular investing culture that we observe in individual investors'(p. 18) 4 The issue whether media sentiment reflects public sentiment or is different from public sentiment-though nteresting in its own right, is beyond the scope of this paper
2 likely to be interested in internet IPOs, because in this period there were so many of them, and many of them had dramatic first-day returns (Benveniste, Ljungqvist, Wilhelm and Yu 2003, Ljungqvist and Wilhelm 2003 and Ritter and Welch 2003). Second, as the internet industry was new, there was no history of cash flows of comparable firms that had gone public. This made valuations difficult, and so expectations of future cash flows for internet IPOs were more likely to be sensitive to media news (Blanchard and Watson 1982; Hirota and Sunder 2002 provide experimental evidence.) Third, the limits to arbitrage were more binding for internet IPOs during the period of 1996-2000 (Lamont and Thaler 2003 and Ofek and Richardson 2003), so the divergence of stock prices from their fundamental value was likely to be greater for internet IPOs. Further, institutional investors did not attempt to trade against market movements, but actively rode with both the run-up and run-down of the stock (Griffin, Harris and Topaloglu 2003 and Brunnermeier and Nagel 2004). Fourth, and finally, there is now increasing evidence that the spectacular rise and spectacular fall of internet IPOs in the late 1990s can not be reconciled with fundamentals (Cooper, Dimitrov and Rau 2001, Ofek and Richardson 2002, Loughran and Ritter 2004).2 A good place to begin looking for other explanations is to formally explore the economic role of the media in this period.3 Was the overall media coverage different for internet IPOs? We read all news items that came out between 1996 through 2000 on 458 internet IPOs and a matching sample of 458 non-internet IPOs – a total of 171,488 news items – and classify each news item as good news, neutral news or bad news. We find, not surprisingly, that the media coverage was more intense for internet IPOs. All types of news – good, bad, or neutral – were more for internet IPOs than for non-internet IPOs in both the bubble period and the post-bubble period. Second, we use net news (good news minus bad news) to proxy media sentiment.4 We find that compared to the matching sample, the net news was more positive for internet IPOs in the bubble 2 Cutler, Poterba and Summers (1989) is one of the early papers that show stock return variances cannot be caused by fundamental news such as macroeconomic news. 3 Shiller (2000) believes that the stock price increases in the late 1990s were driven by irrational euphoria among individual investors, fed by an emphatic media, which maximized TV ratings and catered to investor demand for pseudo-news. Professional investors “are not immune from the effects of the popular investing culture that we observe in individual investors” (p.18). 4 The issue – whether media sentiment reflects public sentiment or is different from public sentiment – though interesting in its own right, is beyond the scope of this paper
period, and more negative for internet IPOs in the post-bubble period. Third, we document that net news increased after a positive stock return, and decreased after a negative stock return for internet firms. This provides some evidence in favor of Shiller's(2000) positive feedback hypothesis. Interestingly, the positive feedback was asymmetric. During the bubble period, net news increases regardless of whether the previous stock return is positive or negative. However, during this bubble period, the increase after a positive stock return was larger for internet IPOs than for non-internet IPOs. These findings reverse in the post-bubble period. In the post-bubble period, net news decreases regardless of whether the previous stock return is positive or negative, however, the decrease in net news after a negative stock return was larger for internet IPOs than for non-internet IPOs. Our results are robust to whether we follow the traditional definition of the bubble in calendar time( the period that ended March 24, 2000)or in event time(the firm- specific period that ended on the day the firms stock price peaked). We, therefore, draw the following conclusion about media coverage of IPOs in the late 1990s: it seems that the overall media coverage was more positive about internet IPOs in the bubble period and more negative about internet IPOs in the post bubble period Did the differential media coverage have any effect on the difference in risk-adjusted returns between internet stocks and non-internet stocks during this period? We check whether news in the media, measured by numbers and type, Granger caused abnormal returns, where abnormal returns is the error term of a Fama-French(1993)three factor model. We incorporate the previous periods abnormal returns as a control when we examined the effect of the media in our analysis. This buys us a few advantages. First, and most important, it corrects for feedback effects: does the media affect returns or do returns affect the media. Both are possible. As a matter of fact, our analysis on aggregate media coverage showed that the latter effect exists. Second, it corrects for possible momentum or reversal in daily stock returns. Third, as the last period's abnormal return contains the cumulative effect of past media reports, it corrects for the possibility that the media effect lasts longer than a day. Finally, because lagged return occurs on the same day as the news reports used for tests, lagged return controls for contemporaneous relationships between stock prices and news coverage. We also control for firm-fixed effects to mitigate the variations in news
3 period, and more negative for internet IPOs in the post-bubble period. Third, we document that net news increased after a positive stock return, and decreased after a negative stock return for internet firms. This provides some evidence in favor of Shiller’s (2000) positive feedback hypothesis. Interestingly, the positive feedback was asymmetric. During the bubble period, net news increases regardless of whether the previous stock return is positive or negative. However, during this bubble period, the increase after a positive stock return was larger for internet IPOs than for non-internet IPOs. These findings reverse in the post-bubble period. In the post-bubble period, net news decreases regardless of whether the previous stock return is positive or negative; however, the decrease in net news after a negative stock return was larger for internet IPOs than for non-internet IPOs. Our results are robust to whether we follow the traditional definition of the bubble in calendar time (the period that ended March 24, 2000) or in event time (the firmspecific period that ended on the day the firm’s stock price peaked). We, therefore, draw the following conclusion about media coverage of IPOs in the late 1990s: it seems that the overall media coverage was more positive about internet IPOs in the bubble period and more negative about internet IPOs in the postbubble period. Did the differential media coverage have any effect on the difference in risk-adjusted returns between internet stocks and non-internet stocks during this period? We check whether news in the media, measured by numbers and type, Granger caused abnormal returns, where abnormal returns is the error term of a Fama-French (1993) three factor model. We incorporate the previous period’s abnormal returns as a control when we examined the effect of the media in our analysis. This buys us a few advantages. First, and most important, it corrects for feedback effects: does the media affect returns or do returns affect the media. Both are possible. As a matter of fact, our analysis on aggregate media coverage showed that the latter effect exists. Second, it corrects for possible momentum or reversal in daily stock returns. Third, as the last period’s abnormal return contains the cumulative effect of past media reports, it corrects for the possibility that the media effect lasts longer than a day. Finally, because lagged return occurs on the same day as the news reports used for tests, lagged return controls for contemporaneous relationships between stock prices and news coverage. We also control for firm-fixed effects to mitigate the variations in news