What Went Wrong With the Dot-Coms?

Abstract

The investment opportunities approach to valuation of growth shares provides a theoretical explanation of the recent fall of Internet stock prices. Managers of Internet firms overinvested in R&D and marketing, which led to negative profitability. Investors questioned the business savvy of managers once they realized they had not been able to convert their growth opportunities into steady earnings. This caused a sell-off in the Internet sector, contributing to poor U.S. market performance.