To what extent has the dot com bubble changed investor behaviour in the USA? This article was completed as part of the Churcher’s to Campus (C2C) courses Ethan Morse Upper Sixth
The ‘Dot Com bubble’ describes the period from 1995 to 2002 where the share value of technology companies on the NASDAQ stock exchange skyrocketed, eventually creating a bubble 200 times the size of the underlying earnings of these companies. Over five years (1995-2000), the NASDAQ Composite Index rose over 500% to a value of 5,048.62 and then plummeted to 1,114.11, losing 77.9% of its value within only 2 years (NASDAQ Composite Index, 2020). The main area of blame when it came to the creation of this technology bubble was focused around investor behaviour and how these investors ignored underlying issues in technology-centred companies such as profitability or longevity and, as a result, pumped money into these firms causing the creation of a bubble. When this bubble finally burst, many large tech companies went bankrupt; this included even those who had been worth hundreds of millions a couple of years previous such as ‘Pets.com’ or ‘eToys. com’. This crash shook many investors who thought the market would continue to grow and believed the companies irms would bring in huge long-term profits and shows why it is important that investors change their behaviour when evaluating a company’s worthcompany’s worth.
If investors ignored the effects of this bubble then there is reason to believe that the cycle of bubbles will continue, which could have disastrous effects on the world economy such as recessions, unemployment and deflation and this is more likely to affect individuals negatively rather than the investors themselves. Unemployment, homelessness, crime, increased debt and unavailability of cheap credit are all factors that a crash can have on individuals, while most investors and investment banks may feel few consequences.
impact on markets and public/private companies so the importance of that behaviour changing as a result of market crashes such as the dot com bubble is critical. One crucial area of change likely to affect investor behaviour is the US regulation of the equity/debt markets. An example of regulation affecting investor behaviour was the J.O.B.S (jumpstart our business start-ups) Act 2012 which was intended to encourage small business funding in the US by easing regulation, therefore encouraging more companies to issue initial public offerings (IPOs) and go public. One way this Act achieved this outcome was by ‘easing requirements for companies with less than $1 billion in annual revenue for up to 10 years, up from the five-year time span that was previously in place’ (Sinéad Carew, a journalist, writing in 2018).
[T]he chief cause of the dot com bubble was the rapid investment in newly created public companies through their IPOs.
In the future, the focus of investing is likely to move from ‘day traders’ to artificial intelligence which can make intelligent decisions, considering all information without the impact of investor bias. This change is already occurring. ‘Machines are likely to take up to 10 per cent - 25 per cent of work across all bank functions with AI and automation’ (HCL, 2020) which should reduce the effect of investor behaviour completely. However, investor behaviour still has a significant
A likely increase in IPO creation shows that investor behaviour has not changed significantly, as the chief cause of the dot com bubble was the rapid investment in newly created public companies through their IPOs, which funded the bubble. This can be shown as: “In 1999, there were 457 IPOs and over 25% doubled in stock prices. But within two years, the infamous dotcom crash erased much of that progress. The number of IPOs plummeted to just 76,” (Bryan Martin, chairman of 8x8, a technology company, writing in 2008). This suggests that investor behaviour has not changed significantly as the regulation guiding it is directly encouraging the type of behaviour that created the dot com bubble by easing the process of firms issuing IPOs. However, other regulation controlling investor behaviour tries to ensure a repeat the dot com bubble does not occur including the Sarbanes-Oxley Act (2002) which ‘is a law the U.S. Congress passed on
Sinead Carew
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