Dotcom Crash

Case Analysis 1: Dot-Com Crash of 2000

1. Intended role of institutions and intermediaries

1.1 Capitalist market has original two participants – investors with their saving want to invest and earn reasonable return, companies who intend to financing and developing their business with enough capital supporting by issuing debt or equity.

1.2 Institutions and intermediaries’ functions are to

·Fulfill the information gap between the above two parties.

·Help the above two parties to determine good investment with expertise services.

·Value the companies fairly to smooth the capital market processes effectively and efficiency.

·With their fiduciary duty, give investors a confidence about capital market.

2. Incentives of misaligned

2.1 No, almost all incentives were misaligned.

2.2 And sell-side analysts’ incentives are mostly misaligned because their main function is to publish research on public companies and give recommendations on stock market. The up-graded or down-graded has great influential to stock prices and transactions.

2.3 However, in Dot-Com bubbles these analysts gives Internet companies with always very optimistic publishing rankings and forecasting recommendations because they devoted themselves in this business and their valuation processes and results were influenced and mislead by banking fees.

2.4 With their optimistic bias almost all the recommendations they gave to investors were buying Internet companies’ stock (70% strong buy/buys versus 1% sell/strong sells).

3. Primarily responsibility for bubble

3.1 Venture capitalists should be blamed mainly for this bubble and crash.

3.2 they pursue a very high return rate of capital. By screen and nurture companies having good business ideas and teams, IPO is the final aim.

3.3 However, in dot-com bubble, venture capitalists invested and bring many public companies without enough valuation and nutrition. These companies were later identified immature with questionable business models...