COPYRIGHT AND CITATION CONSIDERATIONS FOR THIS THESIS/ DISSERTATION

o Attribution — You must give appropriate credit, provide a link to the license, and indicate if
changes were made. You may do so in any reasonable manner, but not in any way that
suggests the licensor endorses you or your use.

o NonCommercial — You may not use the material for commercial purposes.

o ShareAlike — If you remix, transform, or build upon the material, you must distribute your
contributions under the same license as the original.

How to cite this thesis

Surname, Initial(s). (2012). Title of the thesis or dissertation (Doctoral Thesis / Master’s
Dissertation). Johannesburg: University of Johannesburg. Available from:
http://hdl.handle.net/102000/0002 (Accessed: 22 August 2017).
HISTORY NEVER REPEATS ITSELF, BUT IT RHYMES: DOT-COM BUBBLE
INDICATORS AND THE POTENTIAL FOR FUTURE SPECULATIVE BUBBLES

By

GUSTAF VAN ROOYEN

215085076

Submitted in fulfilment of the requirements for the degree

MAGISTER COMMERCII

in

FINANCIAL MANAGEMENT

at the

College of Business and Economics

UNIVERSITY OF JOHANNESBURG

SUPERVISOR: REINETTE VAN GAALEN

2021
ABSTRACT

The occurrence of speculative economic bubbles which has been noted from as early as the
17th century, has a devastating impact on investor wealth and the global economy. One such
notable example is the Dot-com bubble which occurred during the end of the 1990s in the
United States, in which seemingly irreversible increases followed by an equally dramatic
decline in technology share prices were noted as a result of investor optimism in new internet
and technology (.com) companies.

It is well established that speculative bubbles are preceded by an abundance of liquidity and
an extraneous event which leads to investor irrationality, such as the development of new
technological ideas and services. As a result of ongoing 21st century technological
innovations, similarities between the previous Dot-com bubble and the current conditions and
market dynamics have been noted. This study aims to determine whether a second Dot-com
bubble or a new speculative bubble is developing within the U.S. technology market.

In order to address the research objectives and with reference to previous empirical literature,
this study is divided into three areas of investigation. The first relates to the use of technical
and fundamental analysis of U.S. indices which are benchmarked against overall U.S. market
indices, in order to identify a similar bubble pattern to that of the Dot-com bubble. The second
relates to an investigation of IPO underpricing levels, to determine whether the current levels
are comparable to those noted during the Dot-com bubble period. The third relates to an
investigation to determine whether the current conditions within the U.S. technology market
such as federal interest rates and levels of venture capital investment are comparable to the
conditions present during the Dot-com bubble period.

The technical and fundamental analysis identified increases and deviations from the overall
market, similar to that noted during the beginning of the Dot-com bubble. The latest increases
and deviations are however supported by better fundamental values such as earnings. The
IPO underpricing investigation showed that underpricing levels are similar to those that were
noted during the first three years of the Dot-com bubble, but not elevated to the levels noted
during its peak. The investigation of the U.S. technology market noted low interest rates and
increasing levels of venture capital funding, suggesting that there are increased levels of
liquidity within the U.S. economy, which is a contributing factor in sustaining speculative
bubbles.

ii
These results suggest that although the public U.S. technology market, which includes the
technology indices and IPO underpricing levels, resembles the beginning of the Dot-com
bubble, and that this trend is supported by sounder fundamentals and that this does not
constitute a speculative bubble. However, strong indications of a potential speculative bubble
exist within the private technology market as a result of private technology companies with
valuation metrics which exceed Dot-com bubble period levels. With this in mind, the research
objectives of this study were achieved, and this study emphasises the importance of identifying
potential speculative bubbles to proactively react or intervene, in order to minimise their
potential damage to the global economy.

KEYWORDS

Speculative Bubbles; Dot-com Bubble; Technical Analysis; Fundamental Analysis; IPO

Underpricing; Venture Capital; Efficient Market Hypothesis; Behavioural Finance; Technology

iii
DECLARATION OF ORIGINAL WORK

I, Gustaf van Rooyen declare that this study entitled ‘History never repeats itself, but it rhymes:
Dot-com bubble indicators and the potential for future speculative bubbles’, submitted by me
at the University of Johannesburg is my own unaided work. It has not been submitted before
for any degree or examination at any other University, and that all the sources I have used or
quoted have been indicated and acknowledged as complete references.

iv
ACKNOWLEDGEMENTS

I would like to extend a word of appreciation to the following individuals who contributed
significantly in making this study possible:

• I would like to express my very great appreciation to my supervisor Reinette van Gaalen
for her patient guidance, enthusiastic encouragement and valuable suggestions for this
study.
• I am particularly grateful for the assistance given by Jason Gaskell in obtaining the market
data required and guidance in the statistical analysis and interpretation thereof.
• Busy Bee Editing for professionally editing my study.
• I would also like to thank my parents for your encouragement, support and providing me
with valuable opportunities.
• A special thank you to Magnus Jonsson for your understanding, compassion and
continued support.
• To my friends and family, for all your understanding and the gratefully received
distractions.

To God almighty for providing me with the talents and perseverance to complete this study.

v
TABLE OF CONTENTS

ABSTRACT ........................................................................................................................................... II

DECLARATION OF ORIGINAL WORK ............................................................................................... IV

ACKNOWLEDGEMENTS ..................................................................................................................... V

LIST OF TABLES ................................................................................................................................. IX

LIST OF FIGURES ................................................................................................................................ X

CHAPTER 1: INTRODUCTION AND BACKGROUND ......................................................................... 1

1.1 INTRODUCTION .................................................................................................................... 1

1.2 BACKGROUND ..................................................................................................................... 2
1.3 LITERATURE REVIEW .......................................................................................................... 4
1.4 RATIONALE AND RESEARCH PROBLEM ........................................................................... 5
1.5 PURPOSE AND CONTRUBUTION OF THE STUDY ............................................................. 6
1.6 OVERVIEW OF THE METHODOLOGY ................................................................................. 7
1.7 LIMITATIONS OF THE STUDY .............................................................................................. 8
1.8 RESEARCH STRUCTURE .................................................................................................... 9
1.9 CHAPTER SUMMARY ........................................................................................................... 9

CHAPTER 2: LITERATURE REVIEW ................................................................................................ 10

2.1 INTRODUCTION .................................................................................................................. 10

2.2 ECONOMIC BUBBLES ........................................................................................................ 10
2.2.1 Rational bubbles .............................................................................................................. 11
2.2.2 Speculative bubbles ......................................................................................................... 11
2.2.3 Formation of economic bubbles ....................................................................................... 12
2.2.4 Causes of economic bubbles ........................................................................................... 13
2.3 FINANCIAL PHILOSOPHIES ON ECONOMIC BUBBLES................................................... 14
2.3.1 Efficient market hypothesis .............................................................................................. 15
2.3.2 Greater fool theory ........................................................................................................... 16
2.3.3 Behavioural finance theory ............................................................................................... 17
2.4 HISTORICAL SPECULATIVE BUBBLE EPISODES ............................................................ 19
2.4.1 Tulip bubble mania ........................................................................................................... 19
2.4.2 South sea bubble ............................................................................................................. 19
2.4.3 The stock market crash of 1929 ....................................................................................... 20
2.4.4 Dot-com bubble ................................................................................................................ 21
2.5 VENTURE CAPITAL ............................................................................................................ 25
2.5.1 Unicorns ........................................................................................................................... 26
2.6 INITIAL PUBLIC OFFER (IPO) ............................................................................................. 27
2.6.1 IPO process ..................................................................................................................... 27

vi
 2.6.2 Underpricing ..................................................................................................................... 28
2.6.3 Causes of underpricing .................................................................................................... 29
2.7 U.S. STOCK MARKET ......................................................................................................... 32
2.7.1 Primary market ................................................................................................................. 32
2.7.2 Secondary market ............................................................................................................ 32
2.7.3 Stock market indices ........................................................................................................ 33
2.7.4 Stock market indices calculations .................................................................................... 34
2.8 THE INTERNET AND TECHNOLOGY SECTOR ................................................................. 34
2.9 REVIEW OF BUBBLE IDENTIFICATION METHODS .......................................................... 35
2.9.1 U.S. capital markets ......................................................................................................... 36
2.9.2 Initial public offering (IPO) underpricing ........................................................................... 38
2.9.3 U.S. federal interest rates ................................................................................................ 40
2.9.4 Venture capital ................................................................................................................. 42
2.10 EMPIRICAL LITERATURE ON THE POSSIBILITY OF A NEW TECHNOLOGY BUBBLE .. 43
2.11 CONCLUSION ..................................................................................................................... 47

CHAPTER 3: RESEARCH METHODOLOGY ..................................................................................... 49

3.1 INTRODUCTION .................................................................................................................. 49

3.2 RESEARCH STRATEGY ..................................................................................................... 49
3.2.1 Research questions ......................................................................................................... 50
3.2.2 Research objectives ......................................................................................................... 50
3.2.3 Research paradigm .......................................................................................................... 51
3.2.4 Research method ............................................................................................................. 52
3.3 RESEARCH DESIGN ........................................................................................................... 52
3.3.1 Technical and fundamental analysis of U.S. indices ........................................................ 53
3.3.2 IPO underpricing .............................................................................................................. 55
3.3.3 U.S. technology market analysis ...................................................................................... 58
3.4 METHODOLOGY ................................................................................................................. 60
3.4.1 Technical analysis of indices ............................................................................................ 60
3.4.2 Fundamental analysis of indices ...................................................................................... 63
3.4.3 IPO underpricing .............................................................................................................. 65
3.5 VALIDITY AND RELIABILITY OF DATA .............................................................................. 66
3.5.1 Validity .............................................................................................................................. 66
3.5.2 Reliability .......................................................................................................................... 66
3.6 LIMITATIONS....................................................................................................................... 67
3.7 ETHICAL CONSIDERATIONS ............................................................................................. 68
3.8 SUMMARY ........................................................................................................................... 68

CHAPTER 4: RESEARCH RESULTS ................................................................................................ 70

4.1 INTRODUCTION .................................................................................................................. 70

4.2 TECHNICAL ANALYSIS ...................................................................................................... 71

vii
 4.3 FUNDAMENTAL ANALYSIS ................................................................................................ 83
4.3.1 Price-to-earnings ratio (P/E) ............................................................................................. 83
4.3.2 Price-to-sales ratio (P/S) .................................................................................................. 87
4.3.3 Price-to-book ratio (P/B) ................................................................................................... 90
4.4 IPO UNDERPRICING .......................................................................................................... 93
4.4.1 Formulation of hypotheses: IPO underpricing .................................................................. 93
4.4.2 Underpricing of U.S. based companies performing an IPO. ............................................ 94
4.4.3 Underpricing of U.S. based technology companies performing an IPO. .......................... 97
4.4.4 The impact of different IPO characteristics on underpricing by technology companies. .. 99
4.4.5 Overview of the IPO underpricing hypothesis testing .................................................... 103
4.5 U.S. TECHNOLOGY MARKET ANALYSIS ........................................................................ 104
4.5.1 Abundance of financing .................................................................................................. 104
4.5.2 U.S. stock market confidence indices ............................................................................ 105
4.5.3 Venture capital ............................................................................................................... 107
4.5.4 Unicorns ......................................................................................................................... 111
4.6 CONCLUSION ................................................................................................................... 114

CHAPTER 5: DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS ................................ 116

5.1 INTRODUCTION ................................................................................................................ 116

5.2 SUMMARY OF THE STUDY .............................................................................................. 116
5.3 SUMMARY OF THE FINDINGS ......................................................................................... 117
5.4 LIMITATIONS..................................................................................................................... 120
5.5 RECOMMENDATIONS AND FUTURE RESEARCH ......................................................... 120
5.6 CONCLUSION ................................................................................................................... 121

REFERENCES: ................................................................................................................................. 124

APPENDICES: .................................................................................................................................. 134

APPENDIX 1: DESCRIPTIVE STATISTICS RELATING TO THE TIME SERIES DATA UTILISED WITHIN THE ANALYSIS
OF THE U.S. INDICES FOR THE PERIOD 1996 TO 2001 COLLECTED FROM THE BLOOMBERG DATABASE ... 134

APPENDIX 2: DESCRIPTIVE STATISTICS RELATING TO THE TIME SERIES DATA UTILISED WITHIN THE ANALYSIS
OF THE U.S. INDICES FOR THE PERIOD 2014 TO 2019 COLLECTED FROM THE BLOOMBERG DATABASE ... 135

APPENDIX 3: HIGH TECHNOLOGY COMPANIES SIC CODES ................................................................... 137

APPENDIX 4: PRICE-TO-EARNINGS RATIO GRAPHS .............................................................................. 138
APPENDIX 5: PRICE-TO-SALES RATIO GRAPHS .................................................................................... 142
APPENDIX 6: PRICE-TO-BOOK RATIO GRAPHS ..................................................................................... 146

viii
LIST OF TABLES

Table 1: Initial and final dataset of U.S. based IPO data collected from Thomson Reuters Eikon
database. ............................................................................................................................... 56
Table 2: Descriptive statistics relating to finalised dataset of U.S. based IPO data collected
from the Thomson Reuters Eikon database. ......................................................................... 57
Table 3: Final dataset of IPOs comparison to dataset by Ritter 2020 ................................... 66
Table 4: Final dataset of technology IPOs comparison to dataset by Ritter 2020 ................. 67
Table 5: Highest index price with corresponding EPS within the previous Dot-com bubble
period and within the defined period. ..................................................................................... 82
Table 6: Highest Index price-to-earnings ratio within the previous Dot-com bubble period and
within the defined period. ....................................................................................................... 86
Table 7: Highest Index price-to-sales ratio within the previous Dot-com bubble period and
within the defined period. ....................................................................................................... 89
Table 8: Highest Index price-to-book ratio within the previous Dot-com bubble period and
within the defined period. ....................................................................................................... 92
Table 9: Summary statistics relating to underpricing of U.S. based IPOs. ............................ 95
Table 10: T-test statistics relating to underpricing of U.S. based IPOs. ................................ 95
Table 11: Average U.S. based IPO underpricing by year ...................................................... 96
Table 12: Summary statistics relating to technology and non-technology underpricing of U.S.
based IPOs. ........................................................................................................................... 97
Table 13: T-test statistics relating to underpricing of technology and non-technology U.S.
based IPOs. ........................................................................................................................... 98
Table 14: Average U.S. based technology and non-technology IPO underpricing by year ... 98
Table 15: Regression model overview of U.S. based technology IPOs .............................. 100
Table 16: Summary statistics relating to venture capital backed and non-venture capital
backed underpricing of U.S. based technology IPOs. ......................................................... 101
Table 17: T-test statistics relating to underpricing of venture capital backed and non-venture
capital backed U.S. based technology IPOs........................................................................ 101
Table 18: Summary of IPO underpricing hypothesis testing................................................ 103

ix
LIST OF FIGURES

Figure 1: Kindleberger-Minsky model of an economic bubble ............................................... 13

Figure 2: The 1920s stock market bubble ............................................................................. 21
Figure 3: NASDAQ Composite Index versus S&P 500 Index and the Dow Jones Industrial
Average Index for the period 1995 to 2002 ........................................................................... 36
Figure 4: U.S. valuation confidence index for the period 1989 to 2002 ................................. 37
Figure 5: Number of IPOs (bars) and average first day returns (diamonds) by year ............. 39
Figure 6: FED interest rate development during the Dot-com bubble period (1995 to 2001).
............................................................................................................................................... 41
Figure 7: U.S. venture capital investment level and number of deals by quarter for the period
1996 to 2001. ......................................................................................................................... 42
Figure 8: U.S. venture capital investment by sector for the period 1996 to 2001. ................. 43
Figure 9: Summary of empirical literature on the possibility of a new technology bubble. .... 46
Figure 10: Graphical illustration of the overall subdivision of the study from the overall problem
statement. .............................................................................................................................. 51
Figure 11: IPO data description based on the final dataset by calendar year. ...................... 57
Figure 12: Weekly closing price of U.S. Indices from 1996 to 2001. ..................................... 71
Figure 13: Weekly closing price of U.S. Indices from 2014 to 2019. ..................................... 72
Figure 14: NASDAQ Composite Index (CCMP) index price versus earnings from 1996 to 2001.
............................................................................................................................................... 74
Figure 15: NASDAQ Composite Index (CCMP) index price versus earnings from 2014 to 2019.
............................................................................................................................................... 75
Figure 16: NASDAQ Computer Index (IXK) index price versus earnings from 1996 to 2001.
............................................................................................................................................... 75
Figure 17: NASDAQ Computer Index (IXK) index price versus earnings from 2014 to 2019.
............................................................................................................................................... 76
Figure 18: NYSE Arca Tech 100 Index (PSE) index price versus earnings from 2014 to 2019.
............................................................................................................................................... 77
Figure 19: S&P500 Information Technology Sector (S5INFT) index price versus earnings from
1996 to 2001. ......................................................................................................................... 77
Figure 20: S&P500 Information Technology Sector (S5INFT) index price versus earnings from
2014 to 2019. ......................................................................................................................... 78
Figure 21: NASDAQ-100 Technology Sector (NDXT) index price versus earnings from 2014
to 2019. .................................................................................................................................. 79
Figure 22: S&P 500 Index (SPX) index price versus earnings from 1996 to 2001. ............... 79
Figure 23: S&P 500 Index (SPX) index price versus earnings from 2014 to 2019. ............... 80

x
Figure 24: Dow Jones Industrial Average (INDU) index price versus earnings from 1996 to
2001. ...................................................................................................................................... 81
Figure 25: Dow Jones Industrial Average (INDU) index price versus earnings from 2014 to
2019. ...................................................................................................................................... 81
Figure 26: Price-to-earnings ratios of all indices from 1996 to 2001. .................................... 84
Figure 27: Price-to-earnings ratios of all indices from 2014 to 2019. .................................... 85
Figure 28: Price-to-sales ratios of all indices from 1996 to 2001. .......................................... 87
Figure 29: Price-to-sales ratios of all indices from 2014 to 2019. .......................................... 88
Figure 30: Price-to-book ratios of all indices from 1996 to 2001. .......................................... 90
Figure 31: Price-to-book ratios of all indices from 2014 to 2019. .......................................... 91
Figure 32: FED interest rate development for the period 2014 to 2019............................... 104
Figure 33: U.S. valuation confidence index for the period 2014 to September 2020 .......... 106
Figure 34: U.S. crash confidence index for the period 2014 to September 2020 ................ 107
Figure 35: U.S. venture capital investment level and number of deals for the period 1996 to
2019. .................................................................................................................................... 108
Figure 36: U.S. venture capital investment level and number of deals by quarter for the period
2014 to 2019. ....................................................................................................................... 109
Figure 37: U.S. venture capital investment by sector for the period 2014 to 2019. ............. 110
Figure 38: U.S. based unicorn count and aggregate unicorn valuation for the period 2009 to
2019. .................................................................................................................................... 111
Figure 39: Number of active U.S. based unicorns by industry as of June 30, 2019. ........... 112

xi
CHAPTER 1: INTRODUCTION AND BACKGROUND

1.1 INTRODUCTION

During the 1990s in the United States, the development of the internet and networking
technologies represented a new era in the economy which would revolutionize personal and
networked communication. The media created a new sense of prosperity within the public by
stating that this new internet revolution would flood the economy with innovative goods and
services and would also revolutionize commerce, education and medical care. The euphoria
stemming from the internet boom, led to the largest economic bubble in the twentieth century,
known as the Dot-com bubble. During this bubble, huge, seemingly irreversible rises in share
prices within the internet and technology sector occurred within a two-year period from early
1998 through February 2000. This was followed by largely unforeseen plunges by the end of
2000 (Goodnight and Green, 2010).

Ongoing technological evolutions of the 21st century which enable trade with accelerated
speeds, scope and autonomy along with the globalisation of banking and credit markets,
creates the potential for future financial bubbles (Goodnight and Green, 2010). In June 2019,
leading global investment banking and investment management firm, Goldman Sachs Group
Inc, reported to investors that technology shares were overvalued, strongly emphasising their
high valuations, as well as the presence of investor over-optimism. The firm also placed
emphasis on the fact that these share’s premium for growth was elevated and that the
technology sector carried the highest valuation multiples near the peak of the Dot-com bubble.
During 2019, increased attention within the financial media started to draw similarities and
parallels between the Dot-com bubble of the 1990s and the current market indicators of the
possibility of another bubble developing within the technology market (Li, 2019). This study
thus aims to investigate the existence of a possible new bubble within the U.S. technology
market.

In this chapter, the background to the study will be discussed, followed by a review of previous
empirical literature investigating the possibility of a second Dot-com bubble or a new
speculative bubble forming within the U.S. technology market. The review of previous studies
highlights three areas of possible investigation. Thereafter, the overall problem statement is
defined and discussed from the rationale of the study, which results in three research
objectives being developed. In addressing the research objectives set by the study, this will
cement the purpose and contributions of this study. The remainder of this chapter will focus
on providing further background on the three areas of investigation; namely, an overview of

1
the methodologies and the data to be employed within each respective area. This is followed
by a discussion on the limitations of the study and finally, the organisation and structure of the
study will be discussed.

1.2 BACKGROUND

In financial markets, an economic bubble is a self-perpetuating rise or boom in the share prices
of a particular industry. A bubble occurs when speculators note the fast increase in value and
decide to buy in anticipation of further rises, rather than because the shares are undervalued.
Typically, during a bubble, many companies thus become grossly overvalued. When the
bubble “bursts”, share prices fall dramatically (Kennard and Hanne, 2015).

The efficient market hypothesis (EMH), which is the central part of the efficient market theory,
is generally known as the foundation of modern economics. Under this hypothesis, share
prices incorporate and reflect all relevant information, i.e., no investor can beat the market by
buying shares at bargain prices. With the presence of share market crashes and financial
anomalies, the EMH foundation is heavily challenged and through empirical results, the
existence of investor irrationality is supported. Behavioural finance, which is essentially the
opposite of the efficient market hypothesis, argues that investor irrationality can explain some
of the financial phenomena such as share market bubbles and crashes. In order to
demonstrate irrationality, the findings within the study of behavioural finance demonstrate that
investors do not deviate from rationality randomly, but rather mostly deviate in the same way
(Yang, 2006).

Famous historical bubbles include the Dutch Tulip Mania (1634-1637), the South Sea Bubble
(1720) and the 1920s Stock Market Bubble, also known as Black Tuesday. One of the most
recent bubbles was the Dot-com bubble in the late 1990s where internet share prices surged
to astronomical heights until March 2000, before rapidly decreasing by more than 75% by the
end of 2000 (Brunnermeier, 2016). The Dot-com bubble started growing in the late 1990s, as
access to the internet expanded, caused by excessive speculation in internet-based (Dot-com)
companies. With increased investment and investor speculation, share prices grew rapidly.
The value of the NASDAQ Composite, a U.S. based stock market index heavily weighted
towards information technology companies, grew from around 1,000 points in 1995 to more
than 5,000 in 2000. During March of 2000, investors’ confidence declined and with the rise in
interest rates, nearly a trillion US Dollars’ worth of share value had completely evaporated and
subsequently, Dot-com companies were declaring bankruptcy as a result of the loss in share
value at an unsustainable rate (Geier, 2015).

2
One of the best ways for a private company to raise equity is to ‘go public’ and this involves
performing what is known as an initial public offering (IPO). An IPO is the first sale of a firm’s
shares to the public and in general, the overall reasons for firms to perform an IPO is, to raise
equity capital for the firm and to provide more liquidity to its founders by providing them with
the opportunity to sell their shares in the public market (Ritter and Welch, 2002).

A well-known and documented phenomenon known as IPO underpricing occurs when the
price of shares offered by new firms going public are below their relative market value,
resulting in substantial first day returns. IPO underpricing is the difference between the share
price at the close of the first trading day and the price of the offer (Adams, Thornton and Hall,
2008). The average IPO underpricing in the United Sates escalated from 14.8% during the
1990 to 1998 period to 64.6% during the Dot-com bubble period in 1999 to 2000. During 2019
the average IPO underpricing in the U.S. increased to 23.9%, above the noted historical
averages (Ritter, 2020).

Venture capital investors were influenced during the 1998 to 2001 period by the increasing
hype and publicity of internet-based technology businesses and their potential for highly
profitable investments. This hype led investors to perceive these business models as different
and non-traditional, resulting in a dramatic increase in the volume of internet companies being
funded and the amount of capital being invested, thus inflating the Dot-com bubble (Valliere
and Peterson, 2004). Venture capital investments in the United States for 2018 reached 118
billion U.S. Dollars, the second highest point since the era of the Dot-com bubble in 2000
which reached an all-time record high of 119 billion U.S. Dollars (PwC, 2020).

The term unicorn was first coined in the fall of 2013 by venture capitalists Aileen Lee, to
describe a start-up technology company that had achieved a valuation exceeding one billion
U.S. Dollars. Lee analysed 60 000 software and internet companies that received funding
between 2003 to 2013 and found that just 39 start-up companies were labelled as unicorns,
which highlighted the rarity of such companies (Lee, 2013). The usage of the term “unicorn”
along with “tech” and “valuation” in the media has been used in more than 1700 publications
since August 2013 (Rodriguez, 2015). At the end of 2019 there were more than 400 private
equity technology companies that had been labelled as unicorns, which included over 20
decacorns; private equity companies valued at over 10 billion U.S. Dollars worldwide (CB
Insights, 2020).

Several studies have questioned the exceptional valuations obtained by the unicorns and
suggested that these start-up firms are structured in such a way that make them seem to be
worth more than one billion U.S. Dollars. A higher concern other than over-valuation is, the

3
profitability and thus the sustainability of these firms. As with the Dot-com bubble, where
venture capitalists invested in internet start-ups in the hope that these firms would become
profitable, currently there is high level venture capital investment in these unprofitable
unicorns. The result of the exponential growth in the number of unicorns and the large amount
of capital funding available is, increased volatility in former stable industrial sectors and further
concerns of another possible financial crisis (Kenney and Zysman, 2019).

A popular valuation metric known as the price-to-earnings (P/E) ratio, is used in valuing share
prices relative to their underlying earnings. A high P/E ratio indicates overvaluation, as
investors are prepared to pay a premium for potential high growth and profitability (Gottwald,
2012).

In 1999, during the Dot-com bubble era, the P/E ratio of the NASDAQ Composite Index had
surpassed a multiple of 90. During 2019, U.S. based technology companies Facebook Inc,
Amazon.com Inc, Netflix Inc, and Alphabet Inc. (the parent company of Google), all of which
are included within the NASDAQ Composite Index, had a combined forward P/E ratio multiple
of 47.1. This is in contrast with the overall 20 P/E ratio multiple of the index during 2019
(Barnes, 2019). During January 2018, the NASDAQ Composite Index closed at a record high
for the first time since the end of the Dot-com bubble and in July 2019, the index set a new
record high as it traded at 8016 points (Kilburg, 2019).

This new record high set by the Nasdaq Composite Index and elevated valuation metrics, in
combination with increased IPO underpricing and venture capital investment levels, which
were all indicators that were noted during the previous Dot-com bubble, suggest the possibility
of a second Dot-com bubble or the development of a new bubble within the U.S. technology
market.

1.3 LITERATURE REVIEW

Previous empirical literature by van de Hoef (2011), Christoffersen and Gulbrandsen (2011),
Lienkamp and Koepsell (2015), Sousa and Pinho (2014), Van Ooteghem (2016) and Paping
(2017) investigating the possibility of a second Dot-com bubble or new speculative bubble
forming within the U.S. technology market covers various areas of investigation, but can be
grouped into three areas of investigation. The first relates to a technical and fundamental
analysis of U.S. indices. The second relates to an investigation relating to IPO underpricing
levels and the third relates to an analysis of the overall U.S. technology market.

Firstly, studies by van de Hoef (2011), Christoffersen and Gulbrandsen (2011) and Lienkamp
and Koepsell (2015) utilised a form of technical and fundamental analysis of U.S. technology

4
indices and they have noted price increases and deviations reflected by these indices from
the overall market to varying extents, similar to those noted during the Dot-com bubble.

The second area of investigation relates to IPO underpricing levels. Studies by Sousa and
Pinho (2014), Van Ooteghem (2016) and Paping (2017) noted that certain IPO characteristics
experience varying levels of underpricing, which is a similar trend to what was noted during
the Dot-com bubble.

The final area of investigation relates to an overall analysis of the U.S. technology market.
Studies by Christoffersen and Gulbrandsen (2011), Paping (2017) and Van Ooteghem (2016)
evaluated conditions such as the level of interest rates, the level of venture capital investment
and the emergence of unicorn companies to varying degrees; which could be possible
indicators of a new bubble.

From the review of past studies above, it was noted that previous studies covered one or more
areas of investigation but not all possible areas. Studies also only included a limited number
of considerations within the available areas of investigation. From a review of the historical
empirical studies above it was noted that they found mixed and inconclusive results within the
various areas of investigation, which warrants further empirical investigation. This study builds
on previous studies by thoroughly covering the three noted areas of investigation on the
subject matter, while employing the latest datasets available and extending the scope of
research by including all relevant indices, valuation metrics and market conditions. This is
expected to strengthen or improve on past findings and make this present study robust.

1.4 RATIONALE AND RESEARCH PROBLEM

The development and innovation of new technological ideas and services has the ability to
create a sense of overconfidence in investors and as a result, the principles of investing
fundamentals and rationality are ignored. The bursting of the speculative Dot-com bubble
during the end of the 1990s had a devastating impact on investors’ wealth and the welfare of
the economy and society. The bursting of the bubble led to the loss of approximately eight
trillion U.S. Dollars’ worth of shareholders’ wealth (Porras, 2016). The entire U.S. economy
declined due to the bursting of the bubble, which resulted in a large number of individuals
becoming unemployed and the failure of approximately 800 internet and technology
companies (Lienkamp and Koepsell, 2015).

As stated by Crosby and Bodman (2005), when the U.S. economy sneezes, the rest of the
world catches a cold. The recession brought on by the bursting of the Dot-com bubble within
the U.S. economy spread to other global economies due to the size of the U.S. economy and

5
its worldwide influence. The occurrence of bubbles has critical implications for investors and
the economy at large if they are left to occur on their own. They cause financial crises which
destroy a large amount of investor wealth and have critical implications for the world’s
economy (Omoruyi and Hassan, 2017).

In recent financial media, publications and articles relating to the possibility of a second Dot-
com bubble or the development of a new bubble within the U.S. technology market have
received increased attention. With the NASDAQ Composite Index recently breaking its former
record set within the infamous Dot-com era, increased IPO underpricing and venture capital
investment levels and the appearance of private technology companies with questionable
valuations exceeding one billion U.S. Dollars, the following overall problem statement is
formulated:

Do the current conditions and market dynamics contribute to the existence of a

possible new bubble within the U.S. technology market?

The following research objectives have been formulated from the overall problem statement
above and will be addressed within this study:

1. To determine whether a similar bubble pattern to that of the Dot-com bubble can be
identified through the use of technical and fundamental analysis of U.S. technology indices
which are benchmarked against overall U.S. market indices.
2. To determine whether the current levels of IPO underpricing are comparable to that noted
during the Dot-com bubble period, in order to establish the existence of a possible new
bubble.
3. To investigate whether the current conditions within the U.S. technology market such as
federal interest rates and levels of venture capital investment are comparable to the
conditions present during the Dot-com bubble period; in order to establish whether these
contribute to a possible new bubble.

1.5 PURPOSE AND CONTRUBUTION OF THE STUDY

This study aims to provide insight into the current market conditions on both the listed and
unlisted U.S. technology market, in order to reasonably clarify through empirical analysis, the
latest conditions and market dynamics regarding the possibility of a new bubble development
within the U.S. technology market.

Due to the globalisation of financial markets and increasing interaction and dependence on
the U.S. economy by global economies, a speculative bubble could cripple the world’s

6
economy as was noted during the Dot-com bubble. It is thus vital to be able to identify potential
bubbles, as they are developing, in order to minimise the damage that can be caused to the
global economy, companies and individual investors.

This study will contribute to the current debate relating to the existence of a second Dot-com
bubble or a new bubble within the U.S. technology market. The outcome of this research will
be of interest to various stakeholders such as academics, regulators and investors, to identify
the development of potential speculative bubbles and to be provided the opportunity to
proactively react or intervene.

1.6 OVERVIEW OF THE METHODOLOGY

In order to analyse the possibility of a potential new speculative bubble within the U.S.
technology market and with reference to previous studies, this study was divided into three
areas of investigation: The first relates to a technical and fundamental analysis of U.S. indices.
The second relates to an investigation relating to IPO underpricing levels, and the third relates
to an analysis of the overall U.S. technology market. A quantitative non-experimental research
design was implemented in this study. This research method is based on previous studies by
van de Hoef (2011), Christoffersen and Gulbrandsen (2011), Lienkamp and Koepsell (2015),
Sousa and Pinho (2014), Van Ooteghem (2016) and Paping (2017) investigating the possibility
of a second Dot-com bubble or a new speculative bubble forming within the U.S. technology
market.

Technical and fundamental analysis of U.S. Indices

This section which is characterised as a descriptive quantitative research design utilised the
weekly price data collected from Bloomberg for the period 1996 to 2001, which relates to the
Dot-com bubble period, and the 2014 to 2019 periods. Monthly data relating to the U.S.
indices’ valuation ratios such as price-to-earnings, price-to-sales and price-to-book for the
same time periods was also obtained in order to perform the fundamental analysis. The
analysis of both the weekly price data and the monthly valuation data of the U.S. indices was
graphically illustrated.

Initial Public Offerings (IPO) underpricing

This section which is characterised as a correlational quantitative research design utilised data
obtained from Thomson Reuters Eikon relating to U.S. based companies performing IPOs on
U.S. exchanges between January 2014 and December 2019. Through the use of statistical
methods, the level of underpricing was compared to that noted during the Dot-com bubble
period.

7
U.S. technology market analysis

In this section, which is characterised as a descriptive quantitative research design, the U.S.
federal interest rates for the period 2014 to 2019 were compared to the levels noted during
the bubble in the 1920s and the Dot-com bubble.

Subsequently, two U.S. Stock Market Confidence indices were evaluated for the period
January 2014 to September 2020, as an indication of a possible speculative bubble. Venture
capital investment level and the number of deals within the U.S. for the period 1996 to 2019
will also be evaluated.

Finally, the number of U.S. based unicorn companies and their aggregate valuation for the
period 2009 to 2019 were evaluated. This also included an analysis of the number of active
U.S. based unicorns by industry, as of June 30, 2019.

1.7 LIMITATIONS OF THE STUDY

Limitations relating to the size and the scope of datasets utilised within the two out of the three
areas of investigation are considered within this study.

Technical and fundamental analysis of U.S. indices

In terms of the technical and fundamental analysis, three limitations pertaining to this exists.
The first limitation is that the dataset only spans a duration of six years (2014 to 2019) which
accounts for a similar timeframe relating to the historical Dot-com bubble (1996 to 2001). This
represents only a limited timeframe relating to U.S. indices price and ratio data. The justifying
reason for the selection of the timeframe is that this was the latest time series data available
and this six-year timeframe spans a similar duration to that of the Dot-com bubble.

The second limitation relates to the use of only five U.S. technology orientated indices whilst
there are other alternatives available. The justifying reason for the selection of these indices
relates to the fact that they are heavily weighted towards technology and internet companies
and that these indices were present during the Dot-com bubble period and during 2014 to
2019.

The final limitation relates to the use of only three valuation metrics (P/E, P/S and P/B) within
the fundamental analysis. The justification for the use of these metrics relate to the fact that
they were indicators referred to during the Dot-com bubble, the metrics are widely utilised in
fundamental analysis and their ability to identify under- or overvaluation.

8
Initial public offerings (IPO) underpricing

In terms of the IPO underpricing investigation, two limitations exist. The first which relates to
the similar timeframe (2014 to 2019) as utilised for the technical and fundamental analysis.
This represents only a limited timeframe relating to historical U.S. IPO data and the reasoning
for this, is identical to that of the technical and fundamental analysis. Secondly, the historical
IPO data collected was limited to only U.S. based IPOs and no other regions were considered.
The justification for this is that the study limited its scope to identify a potential bubble within
the U.S. technology market only.

1.8 RESEARCH STRUCTURE

This research paper will be structured as follows:

• Chapter 1: Formal introduction of the research topic, the rationale of this study, research
problem, the purpose of the study, and the research objectives.
• Chapter 2: Addresses the theoretical framework relating to the subject of economic
bubbles and a review of the existing literature.
• Chapter 3: Reviews the research approach and methodologies that were utilised for the
analysis of the data collected.
• Chapter 4: Presents the results of the study.
• Chapter 5: Concludes this study and provides recommendations for further areas of
research.

1.9 CHAPTER SUMMARY

Just as the Dot-com bubble, caused by the innovation of the internet and excessive
speculation resulting in a surge of investment into Dot-com companies, the latest
developments within the technology market have resulted in increased investment within
public technology companies and the creation of unicorns. These latest conditions and
dynamics have drawn increased attention within the financial media, where the question has
been posed as to whether we are in a new technology bubble, similar to the Dot-com bubble
of the 1990s.

Chapter 2 presents a literature review on economic bubbles and their relating financial
philosophies, historical economic bubble episodes, economic bubble identification methods,
and empirical literature on the possibility of a new technology bubble.

9
CHAPTER 2: LITERATURE REVIEW

2.1 INTRODUCTION

In general, an economic bubble exists when the market price of an asset exceeds its intrinsic
value, determined by fundamental factors by a significant amount, for an extended period of
time. The efficient market hypothesis states that any significant movements of an asset’s
market value is a consequence of changes in information regarding the fundamentals of the
asset. As a result, the intrinsic value and the market value of the asset should always be
identical and thus, economic bubbles cannot exist unless driven by irrational behaviour
(Evanoff, Kaufman and Malliaris, 2012).

The following chapter reviews the literature relating to the possibility of a new speculative
bubble within the U.S. technology sector and will be divided into eight main parts. The first
part will be based on literature relating to economic bubbles, their formation as well as their
causes. Secondly, the relating financial theories such as the efficient market hypothesis and
the fields of behavioural finance are investigated, followed by notable historical speculative
bubble episodes. The fourth section provides background relating to venture capital
investment, followed by the initial public offering (IPO) process. The last three sections relate
to the background to the U.S. Stock Market, followed by a review of speculative bubble
identification methods and lastly, the provision of an overview of the empirical literature relating
to the possibility of a new speculative technology bubble.

2.2 ECONOMIC BUBBLES

Economic bubbles also known as irrational exuberance, are one of the biggest contemporary
financial issues that exist in financial markets. An economic bubble can be defined as, a period
during which assets are over-valued and become detached from their fundamental value
(Omoruyi and Hassan, 2017). Economic bubbles can be divided into two different sets. The
first would be rational bubbles, where the market price of an asset is higher than its
fundamental value, but the rational expectations of investors justifies this deviation. The
second type of economic bubble is known as a speculative bubble, which occurs when the
market price and the fundamental value diverges to an unsustainable rate, which cannot be
supported by any cash flows such as dividend income (Komáromi, 2006).

10
2.2.1 Rational bubbles

A rational bubble is characterised by a continuous rise in the market price of an asset and
deviation from its fundamental value. Price increases are justified as investors believe through
self-confirming expectations that the asset could be resold to another investor willing to
purchase the asset at a higher price, for the same reason. Thus, a rational bubble can emerge
if investors hold rational expectations regarding future changes in an asset’s market price
(Kortian, 1995).

Komáromi (2006) indicated that the existence of rational bubbles conflicts with rationality
theories as rational bubble models require the assets to have infinite maturity. With rational
expectations and a finite number of investors, a rational bubble cannot exist in a market
equilibrium. If one investor recognises that the share price differs from its fundamental value,
the rational decision would be to sell the share and with a finite number of investors in the
market, that would imply a limit in market demand, resulting in a drop in the share price and
the rational bubble not forming.

A distinct class of rational bubbles which are referred to as intrinsic bubbles which provide a
more plausible description of the departure of asset prices from their intrinsic value. Deviations
in intrinsic bubbles are caused by a nonlinear relationship between fundamentals (such as
dividends) and prices, rather than external factors. Deviations from fundamental values in
intrinsic bubbles can persist for a very long time and thus appear stable, and that does not
result in an increase in asset price volatility. Thus, intrinsic bubbles are solely influenced by
changes in fundamentals. Intrinsic bubbles do not diverge continuously and will revert back to
their fundamental values periodically; thus never bursting or restarting (Nneji, Brooks and
Ward, 2013).

2.2.2 Speculative bubbles

A speculative bubble is defined by Kindleberger (1987) as, ‘A sharp rise in price of an asset
or a range of assets in a continuous process, with the initial rise generating expectations of
further rises and attracting new buyers. Generally, speculators are interested in profits from
trading in the asset rather than from use or earning capacity. The rise is usually followed by a
reversal of expectations and a sharp decline in price, often resulting in a financial crisis.’

The essence of a speculative bubble is a situation in which temporarily high prices are
sustained largely by investors’ enthusiasm, rather than by consistent estimations of
fundamental value. As the prices increase, investors’ enthusiasm increases, which translates
into an increase in demand and hence further increases in prices. This is a form of feedback

11
which occurs as a consequence of increased investor confidence, in response to historical
price increases. A speculative bubble is not indefinitely sustainable as prices cannot go up
forever and when these price increases end, the demand decreases and as a result the
downward feedback can replace the upward feedback (Shiller, 2001).

Speculative bubbles are considered temporary market conditions as a result of excessive

demands, along with unfounded asset price increases. These bubbles grow through massive
pressure from investors aiming to participate in the market profitability, resulting in rapid
increases in asset prices. This growth climaxes and after the bubble bursts, asset prices begin
to fall and pressures created by panicked investors, result in further asset price decreases.
This is considered a common feature of all historical bubbles (Fetiniuc, Ivan and Gherbovej,
2014).

2.2.3 Formation of economic bubbles

As there is no standardised definition of a bubble and no two bubbles are alike, a model is
presented by the economist Charles Kindleberger detailing the various phases of a bubble, as
they all share a common structure. This model is based on the work of Hyman Minsky a
monetary theorist which placed a great emphasis on the role of debt structures in causing
financial crises, especially if credit is utilised in the acquisition of speculative assets (DeLong,
2009).

The Kindleberger-Minsky model comprises five distinguished stages which can be

summarised as: displacement, boom, euphoria, distress and panic (Aliber and Kindleberger,
2017). According to the model, a bubble is initiated by an exogenous shock to the
macroeconomic system, such as the development of technological ideas or innovation which
then leads to expectations about growth and profit. This initial phase is followed by a boom
phase which is characterised by an increase in supply and an expansion of credit, an
increased amount of capital investment and increased investor optimism. During this phase,
asset prices start to rise slowly at first, which then gradually increase as a result of an increase
in the number of interested investors, due to increased media attention.

The boom is followed by a phase of euphoria where asset prices rises exponentially due to
investors who trade overvalued assets at high volumes. During the Dot-com bubble, high
trading volumes and price volumes were observed as uninformed investors such as doctors
and lawyers were day-trading internet shares between appointments. During this phase
informed investors, such as industry insiders, realise that there is a bubble, but other investors
are confident that they can sell the asset at a higher price in the future.

12
At some point, the informed investors sell off their positions and collect profits by cashing in
their investments to less sophisticated investors who still want to participate in the market.
Within the distress phase, there is a decline in confidence caused by an event such as
bankruptcy, a change in government policy or a piece of news (real or rumoured) which
replaces euphoric buying with panicked selling.

The last phase is known as the panic phase/Minsky moment, in which other market
participants realise a crisis is unfolding and as everyone tries to sell off their positions, asset
prices fall dramatically. Typically, if the initial increase was financed through credit, leveraged
companies will go bankrupt and this sell-off typically spreads over into other sectors and other
countries.

Figure 1: Kindleberger-Minsky model of an economic bubble

Source: (Lakos and Szendrei, 2017)

Although Minsky is criticised for focusing this behaviour in terms on business units only and
at the time of writing this was correct, further extensions to this model do not undermine its
validity. On the contrary, the Kindleberger-Minsky model continues to underpin the modern
understanding of the formation of bubbles (Barnes, 2016).

2.2.4 Causes of economic bubbles

Explanations over how and why bubbles are caused have fascinated and perplexed
economists for decades (Jones, 2015). Experience from bubble dynamics is, that they involve

13
an exponential increase in asset prices and subsequent reverse correction, with their effects
spilling over between asset markets. However, the causes relating to their emergence are not
as clear. Following the recent bubbles in the global economy, possible contributors to these
bubbles have been identified, such as excessive global liquidity (available credit and
investment capital) and elements drawn from behavioural finance theory, which further
explains investor irrationality (Kubicová and Komárek, 2011).

Vogel (2010) summarises in his book that bubbles are caused mainly by two overall factors;
liquidity and the effect of behavioural finance traits displayed by investors. The elements of
behavioural finance will be discussed further in detail in Section 2.3 below.

In terms of liquidity, Porras (2016) states that an overly generous provision of liquidity in global
financial markets combined with a very low level of interest rates, promotes the formation of
bubbles. The study by Allen and Gale (2000) indicated a positive relationship between the
abundance of credit made available by favourable interest rates in the banking system and
the development of bubbles. Vogel (2010) also found that the interest-rate policy by financial
institutions similar to that of the U.S. Federal Reserve Bank, has an effect on the creation and
sustainability of bubble conditions.

2.3 FINANCIAL PHILOSOPHIES ON ECONOMIC BUBBLES

The existence of these economic bubbles is in contradiction with the assumptions of the
Efficient Market Hypothesis (EMH), which requires the existence of rational investor
behaviour. The reason for the occurrences of bubbles are as a result of investors’ beliefs that
the demand for the asset will continue, resulting in the fact that market price of the asset is not
driven by market fundamentals but by the beliefs and sentiments of investors. This trend is
explained by the agents of behavioural finance theory. A bubble can also occur through the
conduct of optimistic investors in what is known as the greater fool theory (Omoruyi and
Hassan, 2017).

From the above it can be noted that there are three economic theories impacted by the
existence of economic bubbles:

I. Efficient Market Hypothesis

II. Greater Fool Theory
III. Behavioural Finance Theory

14
2.3.1 Efficient market hypothesis

From the early 1960s to the mid-1990s the Efficient Market Hypothesis (EMH) was considered
to be the most widely accepted guide to the fundamentals of finance and investing. In 1965
Eugene Fama published an article entitled “Random Walks in Stock Market Prices”, where he
defined an “efficient market” for the first time using the theory that the stock market follows
random walks and that this, in turn, challenges the use of technical and fundamental analysis.
He said that: “An efficient market is defined as a market where there are large numbers of
rational, profit-maximisers actively competing, with each trying to predict the future market
value of individual securities, and where important current information is almost freely
available to all participants” (Fama, 1995).

The theoretical basis of the efficient market hypothesis is based on the following three
assumptions. First, investors are assumed to be fully rational and will thus value shares
rationally, considering its fundamentals. Secondly, considering that some of the investors are
not rational, these irrational investors’ trades are not correlated and are thus random and
would therefore cancel each other out without any effect on the share price. Thirdly,
considering the fact that investors are irrational in similar ways, the actions of these irrational
investors are set off by the rational arbitrageurs in the market and thus the actions by the
irrational traders are cancelled out (Shleifer, 2000).

The empirical focus of the efficient market hypothesis is based on two aspects. Firstly, it
considers the impact of new information on share prices, as the hypothesis states that any
new information in markets should correctly be incorporated into the share price immediately.
Secondly, as the share price is equal to its fundamental value, the share price should only
increase or decrease as a result of new information relating to its fundamental value and not
from other factors such as irrationality or behavioural biases (Bouattour and Martinez, 2019).

The efficient market hypothesis includes three forms as follows: weak, semi-strong and strong
forms. The weak form is information that is set in historical information about the share price.
This suggests that the share price today reflects all historical price data and that any
movement in the share price is a result of new information and is not related to previous
information. The share prices under this form of efficiency follow a random walk, where the
future share price cannot be predicted from an analysis of historical prices. Semi-strong
efficiency requires information to be publicly available such as companies’ announcements of
annual earnings, dividends and stock splits; and this public information is quickly reflected in
the share price. The strong form of market efficiency requires that all information, publicly
available and private information not generally available to all investors, is quickly and

15
efficiently reflected in the share price. The strong form of the hypothesis implies that the market
is efficient (Clarke, Jandik and Mandelker, 2001)

During 1973, the Random Walk Hypothesis was popularised by Prof Burton Malkiel’s book
entitled “A Random Walk Down Wall Street”. This hypothesis is consistent with the efficient
market hypothesis in that share prices cannot be predicted, as the price changes are
independent of any past movements or trends. This hypothesis is in line with the weak form
of EMH, as the share prices cannot be predicted by an analysis of previous information
(Burton, 2018).

In 1978, a special issue of the Journal of Financial Economics was published, and its purpose
was to bring together several pieces of evidence that contained inconsistencies regarding
Market Efficiency. The journal included an article by Michael Jensen entitled “Some
Anomalous Evidence Regarding Market Efficiency”. He concluded his article by stating that
the studies when viewed as a whole, highlighted the fact that there are inadequacies regarding
market efficiency and the documentation of further anomalies will provide further
understanding to their underlying causes and will not result in the abandonment of the
efficiency concepts (Jensen, 1978).

The Random Walk Hypothesis was criticised in a book by Professors Andrew W. Lo and A.
Craig MacKinlay entitled: “A non-random walk down Wall Street”. In this book a series of test,
articles and studies are included that support the view that the markets are not completely
random after all and that some components are to some extent predictable. The book
highlights the fact that; “even after three decades of research and literally thousands of journal
articles, economists have not yet reached a consensus about whether markets, particularly
financial markets, are efficient or not” (Lo and MacKinlay, 2011).

2.3.2 Greater fool theory

The economist John Maynard Keynes provided an insightful theory to explain the
phenomenon of economic bubbles in 1936 with his “biggest fool” theory. He argued that
investors did not estimate a company’s fundamental value and compared this with the market
value. Instead, investors were more interested in whether other investors thought that the price
of the share would rise further. Thus, the fundamental value is irrelevant. Keynes used the
notion of a beauty contest, where individuals did not choose the faces which are really the
prettiest but rather based on competitors which are most likely to be chosen by the public i.e.,
based on the reasoning of others. Keynes believed that the stock market behaved in a similar
way, where shares were priced based on what other investors perceived the price to be, and
not based on fundamentals (Barnes, 2016).

16
In a bubble, optimistic investors trade overvalued assets in anticipation of selling these off to
other rapacious investors (the greater fools) at a higher price. The bubble will only burst when
in essence the greater fool becomes the greatest fool, who pays the highest price for the
overvalued asset and thus can no longer find another investor to sell the overvalued asset to
at a higher price. Essentially, the greater fool theory relates to a principle where investors
generally consider their own abilities to be greater than those of the other average investors,
resulting in the belief that there would always be another less informed investor to serve as
the designated greater fool (Barlevy, 2015).

A study conducted by Levine and Zajac (2007) found that economic bubbles still appeared in
experimental markets even when no evidence was found that investors considered his/her
price assessment superior to others (self-serving bias). However, their study confirmed that
investors exhibit a form of herd behaviour where they observe each other and base their
decisions, at least partly, on the imitation of others rather than their own reasoning. Therefore,
the greater fool theory in isolation provides an incomplete formulation of economic bubbles.

2.3.3 Behavioural finance theory

In contradiction to the Efficient Market Hypothesis and one possible way of clarifying the
emergence of bubbles, is to refer to the aspects of the behavioural finance theory. Behavioural
finance deals with the influence of psychology on the behaviour of financial practitioners and
its subsequent impact on stock markets. It provides the explanation for market anomalies that
could not be adequately justified by traditional finance theories. These market anomalies get
projected in the form of economic bubbles such as the speculative Dot-com bubble of the
1990s (Prosad, 2014).

Aliber and Kindleberger (2017) provided a summary of historical economic bubbles and stated
that common to all of these crises is a period of over-trading. In general, the reasons for
overtrading are numerous, but the majority of them can be classified under the stream of
behavioural finance, especially under the topic of ‘overconfidence’, ‘anchoring’ and ‘herding’
(Taipalus, 2012).

Overconfidence

Overconfidence is defined as the investors’ tendency to overestimate both their abilities and
the precision of their knowledge about the value of assets. Overconfidence in financial markets
lead to increases in trading volume, volatility and has an effect on price quality (Odean, 1998).
A study by Wigniolle (2014) utilised a model which provides a precise sense of optimism and
pessimism of investors in order to understand the occurrence of economic bubbles. This

17
model indicated that an optimistic investor overestimates the probability of favourable financial
conditions which leads to highly speculative behaviour. Optimism thus leads to investors
ignoring basic economic movements and instead, they follow their own self-fulfilling
expectations, which then favours the emergence of an economic bubble. The excessive
speculation noted during the historical Dot-com bubble, was the result of increased investor
optimism and overconfidence in the future prosperity of internet-based (Dot-com) companies
during the 1990s (Aliber and Kindleberger, 2017).

Anchoring

Anchoring as mentioned by Vogel (2010), is a behavioural bias which relates to decision-

making under uncertain conditions. In the absence of very reliable new information, investors
will utilise past prices to provide an ‘anchor’ on which their expectations will be based on.

In terms of behavioural finance, the following example can be used as a demonstration:

Although a company is more profitable, its share price does not increase because investors
assume that the change in profitability is only temporary. Thus, the investors will remain
anchored to their previous view of the company’s potential profitability because they have
under-reacted to new, positive information. The investors will not remain at this anchor
indefinitely and will realise that this investment is probably going to continue to be more
profitable in the future (Chaudhary, 2013).

The tendency of investors to use these anchors enforces the similarity of share prices from
one day to the next. Another anchor may be the nearest milestone of a prominent market
index and the use of these anchors helps to explain why individual share prices move together
and thus ultimately why market indexes are as volatile as they are (Shiller, 2015).

Herding

Herd behaviour arises as a result of an information cascade. An information cascade occurs

when investors ignore or underweight their own information and choose to mime the action of
a larger group (Shiller, 1995). Herd behaviour within the context of behavioural finance is the
tendency of investors to follow the actions and consensus of a larger group of investors and
supress their own beliefs during periods of high uncertainty, stress and unusual market
conditions (Taipalus, 2012).

Herd mentality occurs for two reasons. Firstly, as a result of the social pressures of conformity
and to avoid being an outcast from the group, most individuals will irrespective of the rationality
of the group’s behaviour, conform to herding. Secondly, there is a common tendency to believe

18
that a large group is unlikely to be wrong. In the late 1990s, during the Dot-com bubble era,
venture capitalists and private investors ignored basic economic principles and were frantically
investing large amounts of funds into internet related companies, even though most of those
companies did not conform to financially sound business models (Chaudhary, 2013).

2.4 HISTORICAL SPECULATIVE BUBBLE EPISODES

Speculative bubbles are not a new phenomenon, having been identified in commodity and
financial markets dating back to the 17th century in the Netherlands. These historical
speculative bubbles which have been identified within various asset classes have been
researched extensively. A common trait within these historical speculative bubbles are that
they arise when the expectation of the future price of an asset, due to an extraneous event, is
abnormally high and leads to a deviation of asset prices from their fundamental values (Nneji
et al., 2013). The following section will elaborate on some notable examples of speculative
bubbles studied throughout history.

2.4.1 Tulip bubble mania

The earliest known example of a speculative bubble occurred in Holland that started in 1634
and burst in February 1637. Tulips were introduced to Europe in the mid-16th century from
the Ottoman Empire and soon became a highly coveted and a status symbol in Holland. The
Dutch developed a fascination for rare species of tulips that displayed contrasting-coloured
stripes, attracting the attention of speculators. As the supply of rare and exotic tulips was
severely limited and due to the influx of speculators, the demand for these bulbs increased
significantly and as a result the prices rose rapidly. The bubble’s development was a result of
both technical innovations such as a new gardening method to grow exotic bulbs and the use
of new financial instruments such as call-options. At the peak of the tulip bubble, the price of
individual bulbs increased 20 times from November 1636 to February 1637, after which the
prices of tulip bulbs decreased significantly and prices dropped to only a hundredth of their
former prices within a few days (Xiong, 2013).

2.4.2 South sea bubble

The South Sea bubble centred around the South Sea Company which was founded in 1711.
The British international trading company was granted a monopoly to trade with Spain’s
colonies in South America, in return for taking on a substantial amount of Britain’s national
debt. The bubble was created through investor speculation relating to the potential of huge
profits to be made from trading with the gold and silver-rich colonies (Marples, 2020). Many

19
shares in the company were sold as subscription shares in which investors provide a down-
payment and through scheduled instalments, obtained a specified number of shares (Chang,
Newman, Walters and Wills, 2016).

The incredible trade and profits promised by the company never fully materialised and it further
introduced a program offering cash loans to eager investors in order to persuade them to
purchase its shares, taking company shares as collateral. This kept up the demand for its
shares and artificially raised the share prices, causing a bubble to form. By the end of April
1720, shares were selling at almost 350 Great British Pounds (GBP), this rose to 950 GBP by
the end of June of the same year, finally peaking at 1050 GBP. The overinflated share prices
began to fall drastically during the second half of 1720 to a low of 124 GBP during December
1720, which was below their original value (Marples, 2020).

The share prices of the company began to fall due to many shareholders not being able to
afford the subscription and ultimately selling their shares whilst others defaulted, reducing
cash flow further. The demand for shares collapsed and the share price of the company fell
along with it (Chang et al., 2016).

2.4.3 The stock market crash of 1929

Also referred to as the Roaring Twenties, the most commonly accepted explanation for the
United States bubble in the 1920s was that it was formed through a combination of rapid
growth relating to the decade, an irrational element and the expansion of credit in the form of
broker’s loans that leveraged investors. From 1922 to 1929, great economic conditions were
in place within the United States such that there was annual growth of 4.7% and
unemployment averaging at 3.7% accompanied by the emergence of large-scale commercial
and industrial enterprises. New and old corporations issued equities to finance their expansion
and commercial banks moved to investment banking, thus creating new affiliates which grew
from 10 to 114 between 1922 and 1931. A large number of investment trusts also emerged
and grew from about 40 to 750 within the same period (Jiménez, 2011).

The majority of these new investors individually or through the new institutions which
participated in the stock market, lacked relevant experience, thus setting an environment for
the formation of a bubble. From 1922 to 1927 the trend between share prices and dividends
was shared, but between 1928 and 1929 share prices rose in excess of their related dividends.
While the fundamentals in the economy assisted the bubble to form, helping to sustain it. It
was sustained by ease of access to credit and investors’ exuberance. The burst of the bubble
occurred as a result of the rise in real interest rates and a change in the business cycle which
forced investors to dramatically alter their expectations (Jiménez, 2011).

20
Figure 2: The 1920s stock market bubble

Source: (Sardana, 2013)

2.4.4 Dot-com bubble

The Dot-com bubble was a speculative bubble within the late 1990s relating to a euphoric
attitude towards internet and technology business and the future investment prospects of
online (.com) business models. This euphoric attitude lead in an increase in speculative
investments within internet and technology companies, which resulted in a rapid rise in share
prices, ultimately creating what is known as the Dot-com bubble (Lienkamp and Koepsell,
2015).

A speculative bubble is preceded by an extraneous event and further fuelled by an abundance

of liquidity and credit. The increased sense of prosperity relating to the new internet and
technology businesses represented the Dot-com bubble’s extraneous event. This prosperity
was heavily marketed as the “Information Superhighway” by the media during 1993. Narratives
used by the media such as ‘the greatest leap forward in communications since the invention
of the transistor’ and ‘the digital revolution that will create a zillion dollar industry’, accompanied
this new technology. The Federal Reserve lowered interest rates and legislation, thus
restricting investment and commercial banking, both of which were weakened, causing an
increase in capital and attracting foreign capital during the 1990s (Goodnight and Green,
2010).

21
2.4.4.1 The start of the Dot-com bubble

There exists a certain degree of uncertainty relating to the first day of the Dot-com bubble
within academic literature, and this has been a topic of much debate (Lemstra, 2006). There
are two widely accepted alternatives which most finance economists agree on relating to the
first day of the Dot-com bubble, as described by DeLong and Magin (2006). The first
suggested date was during August 1995, the initial public offering (IPO) of Netscape
Communications. The other alternative was that the bubble started sometime before the
irrational exuberance speech by Alan Greenspan during December 1996, as in mid-1996 he
wrote about the volatile future outlook of the stock market.

Netscape Communications was one of the first internet companies and it introduced the
Netscape Navigator which had become the most popular internet browser, with a 90% share
of the market during 1994 and 1995. The young company filed for their initial public offering
on 9 August 1995 with an offer price of 28 US Dollars. The demand for Netscape’s shares
were so high as a result of the increased media attention, that on the first day, the listing
opened trading at 71 US Dollars per share. The share price peaked at 75 US Dollars and
closed at the end of the day at 58 US Dollars per share. At the end of the trading day, Netscape
shares valued the company at 2.1 billion US Dollars even though it had generated only 17
million US Dollars in revenue since its inception (McCullough, 2015).

In December 1996, the U.S. Federal Reserve’s Chairman, Alan Greenspan, gave his
“irrational exuberance” speech. Greenspan suggested that the rise in the share prices traded
on the U.S. markets was due to investor exuberance and this gave way to the possible
existence of a bubble. As a result of this speech, there was an initial decline in the U.S. market
due to investors and speculators anticipating an increase in interest rates. The market
response was short-lived after his speech due to the Federal Reserve failing to raise interest
rates and thus market prices resumed their increase (Meltzer, 2003).

2.4.4.2 Growth and burst of the Dot-com bubble

As a result of the low interest rates and the increased media attention intensifying speculative
investments, the Dot-com bubble was growing at a tremendous speed. Between 1995 and
1998, the number of inexperienced investors who invested directly in shares rose by over
30%. From 1995 until 2000, investors opened 12.5 million new online brokerage accounts,
implying that there was an influx of capital by inexperienced investors who might have been
overconfident in selecting technology shares with fair values (Lienkamp and Koepsell, 2015).

22
During the period September 1998 to March 2000 share prices in the NASDAQ Composite
Index rose by an average of 170% (Johnsson, Lindblom and Platan, 2002). In the late 1990s,
the Netscape IPO model of going public without making profits, was utilized by many
companies and they saw record-setting price rises after the first day of trading. The IPO of
Yahoo, a major internet search engine, had a first day return of 152% on its first day of trading
during 1996. During 1999, a total of 446 companies performed IPOs with extraordinarily high
average first day returns of over 70%. In order to slow the runaway economy the Federal
Reserve increased interest rates by 1.75% both in 1999 and 2000 (Goodnight and Green,
2010).

On 10 March 2000, the technology orientated NASDAQ Composite Index closed at 5 048
points, marking the peak of the Dot-com bubble. The dramatic increases noted during the
beginning of the Dot-com bubble were followed by an equally dramatic fall during March 2000,
thus marking the beginning of the bursting of the Dot-com bubble. The growth in the bubble
was halted due to investors realising that they had been over-optimistic about the new Dot-
com companies and their future profitability potential. The bursting of the Dot-com bubble
resulted in the U.S. economy ending up in a full recession (Lienkamp and Koepsell, 2015).

The dramatic decline in technology shares started in March 2000 and worsened in April as the
decrease spread to other global markets. The NASDAQ Composite Index decreased by 16%
in April 2000 and by February 2001 the index was below the level of 2200 points. In other
words, the NASDAQ Composite Index had lost half of its market value within one year
(Johnsson et al., 2002).

2.4.4.3 Impact of the Dot-com bubble

The impact that the bursting of the Dot-com bubble had on the U.S. economy was significant.
Between 2000 and 2001, approximately 141 000 individuals became unemployed and
subsequently found themselves in a highly competitive job market. Due to the failure of the
internet and technology companies, the entire U.S. economy declined as a result of the
interconnection these companies had with other related industries such as consulting,
advertising and computer hardware and software (Lienkamp and Koepsell, 2015). The market
value of internet and technology companies that performed an IPO during March 2000
declined from one trillion U.S. Dollars to 572 billion U.S. Dollars in December 2000 and
approximately 800 of these companies disappeared completely (Goodnight and Green, 2010).

The causes and the factors that led to the bursting of the Dot-com bubble has been widely
researched and it was concluded that there were two overall causes. Firstly, there was a lack

23
of accurate business models which should have included market metrics relating to revenue
and cash flows. Secondly, many investors were led to speculative investments by the
overwhelming hype targeted towards the internet and the technology market (Lienkamp and
Koepsell, 2015).

During the Dot-com bubble, the majority of the internet and technology companies lacked
accurate fundamental finance metrics such as price-to-earnings ratio (P/E) and sales ratios.
Many companies also did not have sufficient positive free cash flows to base future prospects
on. As a result, some companies based their IPO valuations on non-traditional qualifiers such
as pageviews and user retention (Levine, 2014). During the Dot-com bubble period, many
technology-orientated companies obtained significant capital investments due to hyped-up
future profitability and the fostering of the illusion of future success. This led investors to
believe that positive cash-flows would be generated at a later stage and that these technology
company’s business models were non-traditional. However, the majority of these Dot-com
companies failed to turn their business models into profitable and sustainable businesses
(Valliere and Peterson, 2004).

The Dot-com bubble was defined by speculation and analysis at large institutional banks who
wrote overoptimistic reports on the valuation of the technology companies which contributed
heavily to increasing prices and sustaining the bubble. Analysts’ recommendations on
companies differed significantly from their personal opinions. Analysts would state privately
that certain companies were worthless and possible scams. However, in public, these
companies would receive the highest ranking possible. As a result, the U.S. Securities and
Exchange Commission (SEC) fined many top institutional banks on the basis of fraud and the
deception of investors (Levine, 2014).

As a result of the Dot-com bubble, government regulators and legislators introduced the
Sarbanes-Oxley Act in 2002. The motivation for the enactment of the act was to restore
confidence back into the U.S. stock exchange markets and to increase investor protection by
improving the quality of accounting information, and increasing financial reporting standards
for all publicly traded companies (Siegel, 2015).

24
2.5 VENTURE CAPITAL

Young private companies known as ‘start-ups’ generally have high growth opportunities but
have financing challenges due to asymmetric information. These companies need to raise
external capital in order to finance the free cash flows required during their high-growth years
and the relating product development costs. As these start-up companies grow, their financing
requirements may exceed the resources of individual investors; in which case venture capital
funding is required (Brigham and Daves, 2014).

Venture capital, which is seen as a subset of private equity, involves the provision of
investments in the form of equity financing by institutions, corporations, pensions funds and
wealthy individuals in the early and expansion-stages of a newly established company.
Venture capital investors are usually involved in the management and control of their portfolio
companies and will usually also provide business expertise and mentoring to relatively
inexperienced founders. Venture capitalists focus on the risk/reward ratio and thus have an
interest in ventures with exceptional high growth and high returns opportunities and potential,
such as the technology market. However, in the case of ventures which are built upon ground-
breaking and unproven technologies, these companies are subject to high risk and volatility
(Isaksson, 2006).

Venture capitalists hold an equity position in start-up companies which are usually highly
illiquid in return for their investment. They will usually hold these positions for a few years
before selling them off. The main way for venture capitalists to make a return on their
investment is to disinvest or exit their investment, by means of selling their shares in the start-
up company (Broughman, 2010). There are multiple exit mechanisms available to venture
capitalists of which the most preferred is an initial public offering (IPO), where the start-up
company shares will be sold to the public for the first time, offering the venture capitalist the
opportunity to sell-off its shares to the public. Research into venture capital exits has noted
that U.S. venture capitalists show a strict preference for IPOs (Isaksson, 2006).

During the 1990s there were major technological innovations relating to internet-based (Dot-
com) companies, which resulted in investment and investor speculation. Venture capital firms
within the U.S., especially those based in the San Francisco Bay area, eagerly provided equity
financing to these new Dot-com companies, which represented future growth and profitability
opportunities. The venture capitalist’s initial investments in these Dot-com companies were
then exited by means of an IPO which was arranged by one of the major investment banks in
the United States. The price of the shares at the end of the first day’s trading would often trade
at three or four times the initial IPO price (Aliber and Kindleberger, 2017).

25
2.5.1 Unicorns

The U.S. venture capital system, which was pioneered in the 1940s, reached a historic peak
during the Dot-com bubble and in the aftermath of the bubble by the end of 2000, there was a
collapse in venture capital investment levels. Venture capital investment started to recover in
2014 with the emergence of massive increases in venture capital investing in Silicon Valley,
which forms part of the San Francisco Bay area in the U.S. and the emergence of a large
number of ‘unicorns’. Unicorns are newly founded venture capital-backed private companies
with private valuations of over one billion U.S. Dollars (Kenney and Zysman, 2019).

The term unicorn was first coined in the fall of 2013 by venture capitalists Aileen Lee, and was
first used to emphasise how rare these types of companies are (Lee, 2013). One characteristic
that sets unicorns apart from other start-up companies, is their speed of growth. It is estimated
that unicorns founded between 2012 and 2013 grew twice as fast compared to the ones
founded a decade before. New technologies and ideas, in combination with a very favourable
venture capital environment is the driving force behind the increasing population of unicorns
(Cunningham and Whalley, 2020).

Technological advances, such as online platforms open source software, digital platforms and
cloud computing have decreased the costs to establish start-up companies and has resulted
in lowered entry barriers to disrupt well-established industries (Kiska Jr, 2018). Another
element which contributed to the rapid increase in the population of unicorns is the increase
in the amount and variety of start-up funding available. Fund sizes and total capital managed
by institutional venture capital investors have grown compared to after the Dot-com bubble,
as well as other venture capital sources such as crowd-funding websites, angel investors and
private equity funds (Arrington, 2010).

In contradiction to the record number of IPOs noted during the Dot-com bubble there has been
a persistent low volume of IPOs from 2010 to 2017 (Ritter, 2020). This is despite the low entry
costs, an increase in available venture capital and the passing of the Jumpstart Our Business
Startups Act of 2012 (JOBS Act), which was meant to ease the pathway to IPOs for small
emerging growth companies (Kenney and Zysman, 2019).

A start-up company is assumed to be cash-flow negative and structured to pursue growth at

all costs (Damodaran, 2009). An abundance of venture capital enables the absorption of
operating losses incurred by the growing start-up companies for extended periods of time and
allows for the potential to gather further financing through higher valuations of its future profit-
generating potential. A start-up with the ability to raise increasing amounts of venture capital

26
financing through ever higher private valuations can thus, delay its IPO and remain private for
longer. An ever greater concern than the excessive valuations associated with these
technology unicorns is that these start-up companies will never be profitable and will
eventually collapse completely (Kenney and Zysman, 2019).

2.6 INITIAL PUBLIC OFFER (IPO)

The decision by a company to “go public” is an important decision in the lifecycle of any private
company. An initial public offering (IPO) is the most common method for a company to go
public and involves a private company offering its newly created or existing shares on a public
exchange for the first time (Jenkinson and Ljungqvist, 2001).

There are some notable advantages and disadvantages for a company to go public. The main
advantages of performing an IPO is that it increases the liquidity of the company’s shares and
allows for the founders of the company to sell off their initial investments and diversify their
own portfolios to other investments. Initial public offerings provide opportunities for companies
to raise additional capital and to facilitate any possible future mergers and acquisitions
negotiations as the company will have an established market price. A disadvantage of a
company going public is that the company is required to comply with a range of mandates
from regulators such as the U.S. Securities and Exchange Commission (SEC) and incur
increased costs relating to required specific disclosures, additional reporting and increased
auditing fees (Brigham and Daves, 2014).

2.6.1 IPO process

IPO procedures are governed by different laws in different countries. In the United Sates, IPOs
are regulated by the United States Securities and Exchange Commission (SEC) under the
Securities Act of 1933, in order to protect investors from fraudulent share issues (Brigham and
Daves, 2014). Before a company can perform an IPO, it must first satisfy the thresholds laid
out by the SEC and the relevant stock exchange on which it has chosen to list. These
thresholds vary, but will often include financial thresholds such as revenue, cash-flow or net
profit, a minimum market capitalization and a minimum number of years of business operation
(Espinasse, 2014).

An IPO can be made through several different methods, but the most dominant method within
the world’s major markets including the U.S., is known as the book building method. According
to this method, once the decision has been made to go public, the company will then proceed
by contracting an investment bank to act as an underwriter and to advise the company on its

27
future offering and setting the offer price. The issuing company, together with the assistance
of the underwriter then drafts a prospectus which is filed with the Securities and Exchange
Commission (SEC). This prospectus contains information pertaining to the company and the
IPO, such as financial information, the background of the management, the terms of the offer
and the offer price range (the midpoint of this range is the expected offer price). Once this is
filed, the SEC will carry out due diligence to ensure all required details have been disclosed
(de Pinho, 2013)

The period between the filing of the prospectus and the final offer date, provides the top
management of the company and the underwriter’s analyst with the opportunity to meet and
market the shares to institutional investors. The underwriter will also utilize this time to
evaluate the demand for the shares through nonbinding indications of interest. Should the
demand for the issue be greater or lower than expected, the final offer price will be set higher
or lower within the range set disclosed in the prospectus. Underpricing is a well-documented
fact, due to that IPO share prices tend to increase significantly above their offer price on the
first day of public trading (Bartov, Mohanram and Seethamraju, 2002).

2.6.2 Underpricing

Generally, the IPO share price usually rises above the offering price during the first day of
trading. This increase range from modest to incomprehensibly large. If the increase from the
offering price results in a major increase in the market price of the share, then this IPO is
referred to as being ‘underpriced’ (Hurt, 2004). One of the first empirical evidence on the
existence of the IPO underpricing phenomenon was presented by Ibbotson (1975) who
confirmed the 11.4% average positive initial return on U.S. initial public offerings during the
period 1960 to 1969. Since the 1960s to the end of the 1990s, underpricing in the United
States has averaged around 19%, suggesting that the companies who perform IPOs leave
considerable amounts of money on the table (Ljungqvist, 2007).

Money left on the table is the first day profit of the share gained by the investors who had
allocated shares at the offer price, representing lost capital that would have been raised for
the issuing company had the shares been offered at a higher price. Money left on the table is
defined as the difference between the opening price and the end of the day closing price of
the first day, multiplied by the amount of shares issued (Loughran and Ritter, 2002). Su, Zhang
and Zhang (2020) showed that the loss of potential equity by the issuer due to underpricing is
compensated for by significantly lowered borrowing costs in the bank loan market after the
IPO and that underpricing causes increased market attention and media coverage which in
turn, increases the liquidity of the issuer’s shares.

28
2.6.3 Causes of underpricing

Many economists developed theoretical models to explain the underpricing phenomenon.

They try to answer the question, why do companies leave money on the table? Theories
developed from empirical literature which aims to understand and rationalise why IPOs are
underpriced have been grouped into the following three headings: Information asymmetry
models, institutional and ownership models and behavioural models, with the most established
being information asymmetry models (Ljungqvist, 2007).

2.6.3.1 Information asymmetry models

In an initial public offering, there are three key parties to the transaction: The issuing company,
the underwriter marketing the IPO and the investors purchasing the shares. The information
asymmetry models of underpricing assume that information relating to the IPO is distributed
unevenly amongst these three parties, where one party could be better informed than the
others. The most widely known information asymmetry models is known as the winner’s curse,
signalling theory and principal-agent models (Ljungqvist, 2007).

Rock (1986) Winner’s Curse model assumes that that there are two types of IPO investors,
informed institutional investors who only participate in underpriced IPOs and uninformed
investors who participate in all IPOs. An overpriced IPO will result in a loss for uninformed
investors and thus they will leave the IPO market, reducing the overall demand for shares.
The Winner’s Curse is thus that, underwriters underprice IPOs in order to encourage and keep
the uninformed investors group in the market for initial public offerings. The winner’s curse has
received significant empirical support and most asymmetric information models notes a
positive relationship between higher IPO uncertainty and the degree of underpricing
(Ljungqvist, 2007).

Another model of information asymmetry relates to signalling theory, in which the underwriting
firm purposely underprices its IPO offerings in order to signal to the market the firm’s superior
quality and value (Allen and Faulhaber, 1989). Empirical testing of the signalling theory has
led to inconsistent support for the theory, with the latest research indicating that there is no
evidence that underpricing is positively related to the quality or value of the underwriting firm
(Ljungqvist, 2007).

Underpricing represents a wealth transfer from the issuing company to investors. This can
lead to principle and agency problems between the two parties, especially the occurrence of
side-payments in the form of excessive trading commissions paid to the underwriter by
investors who are competing for favourable allocations of underpriced shares (Loughran and

29
Ritter, 2002). Underwriters may also allocate underpriced shares to institutional investors in
order to secure potential future business, a practice known as ‘spinning’ (Loughran and Ritter,
2004). Following the bursting of the Dot-com bubble, the New York-based brokerage firm and
investment bank, Credit Suisse First Boston was fined 100 million U.S. Dollars in 2002 by the
Securities and Exchange Commission for the allocation of IPO shares to certain customer
accounts in exchange for excessive commission payments to the bank from April 1999 to June
2000 (U.S. Securities and Exchange Commission, 2002).

2.6.3.2 Institutional and ownership models

Ljungqvist (2007) offered institutional and ownership explanations for IPO underpricing. The
institutional explanation being the deliberate underpricing of IPOs based on the stringent U.S.
disclosure rules and the risk of litigation by investors, which underwriters are exposed to. The
ownership explanation relates to where an IPO represented the separation of ownership and
control and the two opposing arguments by managers on the issues of retaining control versus
minimizing agency costs.

A theory formalised by Hughes and Thakor (1992) was based on the fact that underwriting
firms are less likely to be exposed to the risk of litigation by investors if the IPO offer is
underpriced. Investors can sue for any loss incurred from the purchase of a company’s IPO
due to any information which was omitted or misrepresented. The empirical analysis by Lowry
and Shu (2002) argued that there is a link between underpricing and the probability of litigation.
Thus, underwriting firms choose to underwrite IPOs to a certain extent, in order to lower the
probability of litigation. Their study found evidence to support both the insurance and the
deterrence effects of the litigation-risk hypothesis.

In terms of underpricing as a means to retain control, Brennan and Franks (1997) argued that
underpricing provided managers with protection from unwelcome scrutiny or a reduced threat
of being driven out by large shareholders. Brennan and Franks (1997) confirmed that large
bids for shares are discriminated against in favour of smaller allocations of shares spread
throughout many investors, resulting in a more underpriced and oversubscribed IPO. An
opposing argument to the above is that of Stoughton and Zechner (1998) that states that it
may be value-enhancing to allocate large portions of shares to large shareholders. These
large investors are able to monitor companies’ managerial actions and simultaneously reduce
its agency costs. If these shares are spread in smaller allocations, there is less monitoring of
the company and an increased agency cost.

30
2.6.3.3 Behavioural models

During the peak of the Dot-com bubble, between 1999 and 2000, an aggregate of 62 billion
U.S. Dollars was left on the table as a result of underpricing. Many researchers argue that this
staggering scale of underpricing was unlikely, solely the result of information disparity,
institutional explanations or control considerations. As a result, they have turned to
behavioural theories which assume that there are either irrational investors or issuers whom
are subject to behavioural biases, which fail to reduce the level of underpricing of IPOs
(Ljungqvist, 2007).

The first behaviour based explanation provided by Ljungqvist (2007) related to the Welch
information cascade model. In terms of this model, an investment decision by a prospective
investor is based on the information received from other investors and the outcome of their
investment decisions (Welch, 1992). An informational cascade can develop if there is an initial
high demand for an IPO offering, prospective investors interpret this as; earlier investors held
favourable information about the IPO and they disregard their own information, thus causing
a further incentive to invest. Empirical testing of IPO underpricing by Amihud, Hauser and
Kirsh (2003) found that demand for IPO offerings are either extremely low or highly
oversubscribed, with very few cases in between. This testing is consistent with Welch’s theory
of information cascades.

The second behaviour based explanation offered by Ljungqvist (2007) relates to irrational or
sentimental investors. The study by Baker and Wurgler (2007) defined that investor sentiment
is an irrational decision driven by an optimistic belief about the future prospects of the IPO
company, which encourages the investors to trade on a basis of speculation and disregards
fundamental data. During the Dot-com bubble, a study by Ofek and Richardson (2003)
indicated that high levels of underpricing occurred as a result of optimistic investors and
documented a significant positive relationship between investor sentiment and the level of IPO
underpricing during that period.

Loughran and Ritter (2002) proposed another behaviour-based explanation from the issuers
of the IPO perspective, known as prospect theory. This theory assumes that issuers are more
concerned with change in their wealth rather than the level of their wealth. Thus, the issuing
company does not concern itself with the loss relating to underpricing, as it will be
compensated for its loss by the wealth gained when they sell the retained shares with the price
increases after the IPO. This was especially evident during the Dot-com bubble where an
average of 9.1 million U.S. Dollars per IPO was left on the table (Loughran and Ritter, 2002).
The prospect theory was empirically tested by Ljungqvist and Wilhelm (2005), where their
tests indicated an explanatory power for the theory.

31
2.7 U.S. STOCK MARKET

Masoud (2013) averred that a stock represents a share of ownership of the earnings and
assets of a company and the stock market or stock exchange represents a marketplace in
which shares of companies are traded. Stock exchanges serve two main purposes; the first to
facilitate the raising of new equity capital and secondly, to enable the subsequent trading of
these shares and other securities. The raising of new equity capital by private companies
though the issue of newly created or existing shares to the public through an initial public
offering (IPO) occurs within the primary market and the subsequent trading of these shares
occurs within the secondary market. The efficient operation of both these markets is important
to an economy (Jenkinson and Ljungqvist, 2001).

2.7.1 Primary market

The primary market is also known as the issue market and is characterized by companies that
sell bonds or shares for the first time, typically through an initial public offering (IPO). This
market consists of issuing companies, the investing public, and intermediaries such as brokers
and underwriters. The primary market can only be utilized by investors to buy shares and
debentures and re-selling is only permitted within the secondary market. Stock exchanges
provide a market where investment within both the primary and the secondary market can be
made. The funds raised within the primary market will be in the nature of ownership or debt
and this market is vital to capitalist economies, as it provides a valuable source of finance to
companies who utilize these funds in order to finance operational activities (Kumar, 2012)

2.7.2 Secondary market

The secondary market is where the sale of previously issued shares occur and within the
secondary market, shares are sold and transferred from one investor to another. The
secondary market is highly liquid i.e., shares move quickly between investors and can be
exchanged for cash quickly and without substantial loss in market value. Major global stock
exchanges such as the New York Stock Exchange (NYSE) are the most visible examples of
liquid secondary markets (Masoud, 2013).

The New York Stock Exchange (NYSE) is an American stock exchange and is the world’s
largest stock exchange by market capitalization as of June 2020 (New York Stock Exchange,
2020). The NYSE was formerly a private organization until 2005 when it became a publicly
traded company, and it owes its size and global reach due to a series of mergers. One
distinguishing characteristic of the NYSE is their continued reliance on an auction based

32
(person-to-person) trading floor, which is in contrast with the National Association of Securities
Dealers Automated Quotations (NASDAQ), where all trades occur entirely electronically
(Capital Com, 2020)

The NASDAQ (National Association of Securities Dealers Automated Quotations) is the

second largest stock exchange by market capitalization in the world, the largest being the
NYSE as of June 2020. This major US stock exchange was founded in 1971 and is a publicly
owned company with all its shares traded electronically through an automated network of
computers. The exchange’s equities are mostly represented by high-technology, software,
computer and internet companies, although other industries also trade on the exchange
(Kennon, 2020).

2.7.3 Stock market indices

A stock market index is a hypothetical portfolio of investment holdings which represents a

segment of the financial market. Indexes are collections of shares to replicate an economy,
market or sector and are utilized by investors to follow the financial markets and benchmark
the performance of their portfolio of investments. The S&P 500 Index and the Dow Jones
Industrial Average (DJIA) are the most commonly used stock market indices to track the
performance of the US equity market (Young, 2020).

The S&P 500 Index, which is based on the market capitalisation of 500 publicly traded
companies, is a float-adjusted market capitalization-weighted index. This means that the
S&P500 is weighted similarly to other market capitalization weighed indices, except that only
publicly traded shares which are available to investors are included within the index. The
world-renowned S&P500 index was the first U.S. market index launched in 1957, which covers
all major areas of the of the U.S. economy and is regarded as the best gauge of the U.S.
equities market (S&P Dow Jones Indices LLC, 2020).

The Dow Jones Industrial Average (INDU) is a price-weighted index launched in May 1896
and contains 30 of the largest and most influential companies in the United States. The 30
companies included within the index are based on the reputation of the company, and
sustained growth by the company and if it is of interest to a large number of investors. The
index covers all U.S. industries except transportation and utilities (S&P Dow Jones Indices
LLC, 2020). It is one of the most recognised and widely followed U.S. benchmark indices in
the world and is utilised as one of the indicators on the overall performance of the United
States economy (Corporate Financial Institute, 2020a).

33
2.7.4 Stock market indices calculations

The process of determining the stock index’s value is governed by the index’s chosen method
of allocating the shares which forms part of the index. Thus the weighing method reflects the
design of the index and the most common weighting strategy is based on market capitalisation
(Young, 2020). A market capitalization-weighted index utilizes the value of outstanding shares
to determine the impact that a particular share will have on the overall index results. Thus,
with reference to the composition of a market capitalization-weighted index, large movements
in share value for large companies included within the index, significantly impacts the overall
value of the index (Chen, 2019).

A stock market index can also be price weighted, which results in the fact that the highest
prices shares have the highest weightings within the portfolio, regardless of their total market
capitalisation. This means that the index holds the same number of shares of each company
and the price of the share is the influencing factor in determining the value of the index.
Another alternative index weighting method relates to equal weighting of each constituent
within the index portfolio. In this method, equal weighting is given to each share within the
portfolio, irrespective of its market capitalisation or share price. This translates to the fact that
each constituent within the portfolio exerts an equal impact on the overall value of the index
(Forjan, 2019).

2.8 THE INTERNET AND TECHNOLOGY SECTOR

The largest segments of stock markets are the technology, financial and industrial sectors,
respectively. The main distinguishing feature of the technology sector, compared to other
sectors, is that technological products and services are disseminated throughout the entire
economy. This means that all other business sectors rely heavily on technological innovations
and services. The technology sector is often associated with innovative products and services,
which results in investors expecting high research and development expenses. This sector is
also known to be very competitive (Van Ooteghem, 2016).

Companies from sectors other than the technology sector generally consist of mainly tangible
assets such as machinery and buildings with relatively few intangible assets. Internet and
technology companies are characterised by minimal tangible assets with the majority of their
assets being intangible. Intangible assets are non-monetary assets without physical
substance such as brand, reputation and intellectual property, which include trademarks,
patents and in-house developed software. Valuing internet and technology companies is
complex due to the fact that they invest heavily in the research and development of intangible

34
assets which are technology-based products and services, whose value is typically hard to
ascertain. Companies within the internet and technology sector conduct most of their business
activities over internet based platforms and thus, they generate the majority of their revenue
through the internet (Christoffersen and Gulbrandsen, 2011).

2.9 REVIEW OF BUBBLE IDENTIFICATION METHODS

A characteristic which was noted in the study of previous bubbles, is the existence of high
prices and high trading volumes. In addition, there were high levels of price volatility observed.
The high prices associated with historical bubbles resulted in high valuation ratios such as
price-to-earnings ratios, which were not substantiated by fundamental values. During previous
bubbles it was also noted that information asymmetry between investors relating to
fundamental values and optimism relating to future values, created a sense of overconfidence
in investors (Scheinkman and Xiong, 2003). As previously mentioned in Section 2.6 above,
high levels of IPO underpricing occurred during previous bubbles as a result of optimistic
investors.

A focus of this study will therefore be the price and valuation ratio dynamics noted during
historic bubble episodes as well as the historical levels of IPO underpricing. The first two sub-
sections following this introduction will further elaborate on the role of the above indicators on
the development of speculative bubbles.

Another characteristic noted in the study of previous bubbles is that their rapid growth and
acceleration was evidently associated with the expansion of credit and money. The tulip
bubble developed as a result of the sellers of the bulbs providing credit to buyers and the
South Sea bubble was fuelled through the provision of credit by Sword Blade Bank. Similarly,
the expansion of credit in the U.S. call-money market during the 1920s facilitated the growth
of the stock market crash of 1929 (Aliber and Kindleberger, 2017).

Another focus of this study will therefore be on the role of favourable interest rates in increasing
the availability of financing and capital for institutional and professional investors such as
venture capitalists. The last two sub-sections of this section will further elaborate firstly on the
role of U.S. federal interest rates and secondly, the role of venture capital investments on the
development of speculative bubbles.

35
2.9.1 U.S. capital markets

The behaviour of market prices of shares during historical speculative bubbles such as the
bubble during the 1920s and the Dot-com bubble have presented a challenge to philosophical
fundamentals to finance and investing. A key characteristic of both of these speculative
bubbles is the high volatility of their share prices and high trading volumes, with deviations
from their fundamental values also noted (Cochrane, 2002). In order to demonstrate the
movements in share prices during the Dot-com bubble period, Figure 3 below illustrates the
NASDAQ Composite Index benchmarked against the Dow Jones and S&P 500. The above
indices were rebased to 100 at the start of the period in January 1995.

Figure 3: NASDAQ Composite Index versus S&P 500 Index and the Dow Jones
Industrial Average Index for the period 1995 to 2002

Source: (Lienkamp and Koepsell, 2015)

The figure above shows the NASDAQ Composite, the Dow Jones Industrial Average and S&P
500 indices before and after the Dot-com bubble period. What is evident from the figure is that
all these indices moved in line with each other during the beginning of the Dot-com bubble
period, this however changed dramatically when from the beginning of 1999, the NASDAQ
Composite Index price rose dramatically and increased in value more than six times, whereas
the other two indices only increased by three times. The Dot-com bubble affected the
NASDAQ Composite index more than the other two indices due to its relatively high portion of

36
technology orientated components. After the collapse of the Dot-com bubble during 2000, the
NASDAQ Composite Index drastically dropped back to similar levels as those of the other two
indices and continued to move in line with them over the remainder of the period (Lienkamp
and Koepsell, 2015).

A signal of overvaluation and deviation from fundamental values is the presence of high
valuation ratios such as the price-to-earnings (P/E) ratios, as noted during the Dot-com bubble.
Internet and technology orientated companies during the period had P/E ratios of more than
40%, with some individual companies achieving ratios of 200%. This is beyond the historical
average of 14%, which is based on a period of 127 years before the Dot-com bubble (van de
Hoef, 2011).

In his book titled ‘Irrational exuberance’, Nobel Laureate in economics sciences Robert Shiller,
provided another metric which demonstrated the fact that share prices during speculative
bubbles obey factors other than pure pricing of fundamentals. His U.S. stock market valuation
confidence index shows a clear decline in investor confidence in the valuation of the stock
market during the rise of the Dot-com bubble, down to a minimum in April 2000, with only 30%
of investors agreed that the stock market was not overvalued. Investors were aware of the
overvaluation within the share market and thus they precipitated the Dot-com bubble (Le Bris,
2016).

Figure 4: U.S. valuation confidence index for the period 1989 to 2002

Source: (Yale School of Management, 2020b)

37
In order to survey the behaviour of U.S. investors, Professor Robert Shiller began collecting
questionnaire data in order to produce U.S. stock market confidence indices available from
October 1989. Under the supervision of Shiller, Yale University now conducts these surveys,
making it the longest-running effort to measure investor confidence and related investor
attitudes (Yale School of Management, 2020a). The U.S. valuation confidence index
presented in Figure 4 above is one of the four U.S. stock market confidence indices and it
showed a steady decline in stock market valuation confidence levels to a low of 31.03 for U.S.
institutional investors and 27.68% for U.S. individual investors during April 2000 (Yale School
of Management, 2020b). This translates to approximately 30% of investors who believed that
the market was not overvalued and the remaining 70% believed it was overvalued, during the
peak of the Dot-com bubble.

2.9.2 Initial public offering (IPO) underpricing

In terms of an historical perspective, it becomes evident that Initial Public Offerings (IPO)
volumes come in waves. IPO waves are caused by an increase in expected profitability and
are preceded by valuation uncertainties and share price volatilities, as noted during the Dot-
com bubble during the 1990s (Pastor and Veronesi, 2003). Empirical evidence relating to the
varying levels of IPO volumes and relating levels of underpricing during the various timelines
of the Dot-com bubble period was provided by Ljungqvist and Wilhelm (2003), Loughran and
Ritter (2004) and Pinheiro, de Carvalho and Sampaio (2016).

During the study undertaken by Ljungqvist and Wilhelm (2003), relating to the increased IPO
volumes and levels of underpricing during the Dot-com bubble period, they noted that during
1996, the average level of underpricing was 17% and during 1999 and 2000, known as the
peak of the Dot-com bubble, this averaged 69% and 56%, respectively. Their study indicated
that increased underpricing levels were noted for young and technology orientated companies
performing their IPOs during this period. Their study also noted that the companies were
fundamentally riskier, which created an increased level of uncertainty and simultaneously,
investor optimism.

Research performed by Loughran and Ritter (2004), indicated that during the period before
the Dot-com bubble 1990 to 1995, the average underpricing level for companies performing
IPOs was 12.85%, which increased to 64% during the peak of Dot-com bubble period 1999 to
2000; and then during the post-bubble period 2001 to 2003, the level reverted back to 12%.
Their research also found a positive correlation between certain IPO characteristics and the
relative level of underpricing that technology and internet orientated companies and venture
capital backed companies experienced.

38
The following graph shows the number of U.S. based initial public offerings and the average
of initial returns from 1980 to 2003.

Figure 5: Number of IPOs (bars) and average first day returns (diamonds) by year

Source: (Loughran and Ritter, 2004)

A further study by Pinheiro et al. (2016) relating to the IPO underpricing and the effect of
various IPO characteristics on the level of underpricing experienced during the Dot-com
bubble period indicated that the average level of underpricing noted during the period 1991 to
1996 was 16% and that it was 20% during 1997 and 1998, and it then reached a peak of 66%
during the period 1999 to 2000. Their study also noted that the combination of characteristics
such as young, venture capital backed, and technology orientated companies experienced the
highest level of underpricing.

From the above empirical research and graph it can be summarised that IPO activity
comprises cyclical periods wherein a large number of offerings are followed by periods with
very few offerings, typically after the bursting of a bubble. Just as with the Dot-com bubble, a
large number of IPOs and a high level of IPO underpricing was noted as a result of investor
optimism during that period, which was then followed by a sharp decline in offerings and level
of underpricing associated with the bursting of the bubble.

39
2.9.3 U.S. federal interest rates

As stated by Vogel (2010) and Porras (2016), the existence of favourable low interest rates
has an effect on the formation and sustainability of speculative bubbles. These low interest
rates occur as a result of interest rate policies, as managed by financial institutions such as
the U.S. Federal Reserve Bank (FED). The FED’s primary policy tool is the setting of short-
term interest rates. Interest rates are lowered in order to stimulate economic activity by
reducing borrowing costs in the presence of low inflation and high levels of unemployment. By
contrast, interest rates are raised in the presence of high inflation and low levels of
unemployment, in order to prevent the economy from overheating (Kashkari, 2017).

Nikolic (2019) stated that the U.S. Federal Reserve Bank (FED) interest rate policy had a
direct impact on the creation of bubbles in the U.S. Lowered interest rates cause excess
liquidity and cash within an economy, due to lowered borrowing costs. This excess liquidity
causes increased investment spending, which results in increases in asset prices, and thus
the formation of a bubble. When the bubble prices start to rise at a higher rate than the overall
market, speculative investors will increase their investments, resulting in further excessive
increases in prices. In an effort to subdue the overheated economy, the FED will raise interest
rates in order to decrease investor spending. This decrease in liquidity causes prices to fall
dramatically and thus the bursting of the bubble follows. The bursting of any sufficiently large
bubble causes an entire economy to go into a recession. Subsequently, in order to foster
recovery, the FED will lower interest rates again, causing the entire cycle to repeat.

In terms of the 1920s stock market bubble, this bubble started as a result of eased credit
requirements and lowered interest rates instituted by the FED during 1921 and throughout
1922, in order to stimulate the economy. This resulted in increased borrowing and increases
in overall liquidity within the economy, and this steady supply of money and credit resulted in
excessive increases in share prices. These increases continued throughout most of the 1920s
until 1929, when financial institutions and investors became sceptical, knowing that these
continuous increases in share prices could not last indefinitely. This resulted in a vast sell-off
of investments at such a rate that banks could not fulfil the requests due to limited available
capital, which saw the insolvency of several large banks. The bursting of that bubble led to the
worst economic recession in U.S. history, known as the Great Depression (Chappelow, 2020).
In order to stop the increases, the FED tightened monetary and credit conditions. The interest
rate was raised in four stages from 3.50% in January 1928 to 6.00% in August 1929 (Liu,
Santoni and Stone, 1995).

40
In terms of the Dot-com bubble of the 1990s, Auerbach (2008) argued that although the U.S.
Federal Reserve Bank did not initiate the bubble, it did help finance its growth through its
policies regarding interest rates. These interest rates policies during the last half of the 1990s
resulted in an increase of over a trillion U.S. Dollars in the availability of money and credit from
1996 to 2000. During the beginning of 1995, the FED started easing the monetary policy by
decreasing interest rates. The result was a growth in money supply which began to flow into
the emerging technology sector (Chappelow, 2020).

The interest rate was steadily decreased from 6.00% in June 1995 to 4.63% in January 1999.
In order to curb the growth of the Dot-com bubble, the FED increased interest rates from the
low noted in January 1999 to 6.54% during July 2000. In order to stimulate the economy which
had slipped into a recession during early 2001, the FED decreased interest rates 11 times
during 2001. The interest rate was decreased from 5.98% during January 2001 to 1.82%
during December 2001 (Callahan and Garrison, 2003).

The figure below illustrates the FED interest rates development from the beginning of 1995 to
the end of 2001, with the grey highlighted area indicating a period in which the U.S. economy
was in a recession, due to the bursting of the Dot-com bubble.

Figure 6: FED interest rate development during the Dot-com bubble period (1995 to
2001).

Source: (Macrotrends, 2020)

41
2.9.4 Venture capital

Venture capital investment in the United States has displayed a fluctuating pattern. The
industry has experienced high and low periods of investment activity since the 1970s. During
the Dot-com bubble period, more than 161 billion U.S. Dollars of venture capital was invested
during 1999 and 2000, with the level of investment during 2000 being more than four times
that of 1998 (Green, 2004).

Figure 7: U.S. venture capital investment level and number of deals by quarter for the
period 1996 to 2001.

Source: (PwC, 2020) and Researcher’s own deductions

From the figure above, which represents the timeline of the Dot-com bubble, during the period
1996 to 1998, there was a steady increase in both the amounts invested and the number of
deals. From the first quarter in 1999 to the first quarter of 2000 there was an increase from
982 deals to 2273 deals respectively, which translates to an increase of 231.47% and for the
same quarters an increase in total venture capital investment from 7.15 Billion U.S. Dollars to
34.04 Billion U.S. Dollars: translating to a 476.08% increase. This increase was mirrored by a
decrease from the second quarter of 2000 to the third quarter of 2001 of 52.71% in the number
of deals and 68.59% in venture capital invested (PwC, 2020). This indicated that during the
Dot-com bubble period, venture capital investment in the U.S. and the relating number of deals
exponentially increased and decreased within approximately a 12-month period.

42
Figure 8: U.S. venture capital investment by sector for the period 1996 to 2001.

Source: (PwC, 2020) and Researcher’s own deductions

From the figure above it can be noted that U.S. venture capital investment relating to internet
and software which are subsectors to the overall technology sector, made up 38% of the total
investment during the Dot-com bubble period. Venture capital investment within the
technology sector during the Dot-com period constituted 105 billion U.S. Dollars of the total of
277 billion U.S. Dollars. There were a total of 28 003 venture capital deals within the Dot-com
bubble period of which 11 248 related to the technology sector. This constituted 40% of all
deals during the period (PwC, 2020).

2.10 EMPIRICAL LITERATURE ON THE POSSIBILITY OF A NEW

TECHNOLOGY BUBBLE

The initial research conducted by van de Hoef (2011) relating to the possibility of a second
internet bubble, focused primarily on the Dot-com bubble. The study comprised a three-part
technical and fundamental analysis in which the bubble during the Dot-com period was
identified, and possible signals of the Dot-com bubble and a study of the Dot-com bubble itself
was conducted.

For the technical and fundamental analysis two U.S. based technology orientated indices were
utilised. The fundamental analysis utilised and underlined the importance of financial
measures such as earnings per share (EPS), price-to-earnings (P/E) ratio and earnings yields.
These financial measures noted during the Dot-com bubble were then compared to the
internet and technology companies present during 2010, and it was then concluded that those

43
companies showed stable business models and were profitable, unlike the companies present
during the Dot-com bubble.

The study by Christoffersen and Gulbrandsen (2011) utilised technical and fundamental
analysis in order to determine the possibility of a new technology bubble, with comparisons
taken from the Dot-com bubble. Their technical and fundamental analysis covered the period
from 1995 to 2011 and utilised four indices that represent the U.S. technology sector and an
overall U.S. market benchmark index. Their fundamental analysis of the indexes included P/E
ratio, price/earnings-to-growth (PEG) ratio, free cash flow yield and the financial leverage ratio.

Additionally, the study included an analysis of the U.S. technology market and an analysis of
five unlisted internet companies. Their analysis of the U.S. technology market included various
macroeconomic factors and emphasised the importance of these in aiding the development
of the Dot-com bubble and the potential new technology bubble. The study concluded that by
the end of 2011, the U.S. technology indices showed indications of overvaluation, but that they
were nowhere near the levels noted during the Dot-com bubble, thus no convincing evidence
of a bubble in the U.S. stock market was found. However, there appeared to be a bubble within
the private technology market, due to excessive valuations of private technology companies.

A subsequent study performed by Lienkamp and Koepsell (2015) relating to the possibility of
a second Dot-com bubble, included technical and fundamental analysis of the NASDAQ
Composite Index, a U.S. based technology orientated index. The technical analysis
investigated the development of the index from the start of the Dot-com bubble in 1995 until
2014. The index was also benchmarked against two overall U.S. market indexes; Standard &
Poor’s 500 Index and the Dow Jones Industrial Average Index (Dow Jones).

The composition of the index was also evaluated at two intervals, the first which was just
before the Dot-com bubble hit its peak in December 1999 and secondly in December 2014,
which was the market situation at the time. The composition of the index was examined by
studying the number of components listed, the P/E ratio, the price-to-book ratio (P/B) and
dividend yield in each of the two intervals under review. The study concluded with mixed
results on the potential of a new bubble development as the analysis of the NASDAQ
Composite Index indicated accelerated growth but also that the development of the
fundamental values was not close to the levels recorded during the Dot-com bubble.

A study by Sousa and Pinho (2014) investigated the possibility of a potential second Dot-com
bubble with a focus on IPO offer prices, as well as the related underpricing levels within the
U.S. internet industry. Their study focused on the major financial and non-financial drivers of

44
IPO pricing of internet companies between 2009 and 2012 and compared this to the drivers
present during the Dot-com bubble. Their study found that as with the Dot-com bubble, riskier
internet and technology companies tend to induce a higher level of underpricing. The study
also noted that investor speculation and optimism regarding internet companies also led to
increases in IPO prices.

A study by Van Ooteghem (2016) entitled ‘Is the Internet facing a Bubble 2.0?’, investigated
and evaluated evidence that the U.S. technology sector was in a bubble similar to the Dot-
com bubble. This study included a technical analysis of the NASDAQ Composite Index for the
period from 1998 to 2015 and an analysis of the index’s P/E ratio. The study investigated IPO
volumes and related levels of IPO underpricing for the period 2014 to early 2015, and found a
decrease in the number of IPOs, compared to the levels noted during the Dot-com bubble and
found that riskier IPOs experienced increased levels of underpricing.

The investigation also included an analysis of overall technology market factors, such as the
increasing levels of venture capital funding and the appearance of unicorn companies. The
study was concluded by estimating a risk of a bubble in the public market as moderate, while
there was a higher risk within the private technology market.

A subsequent study by Paping (2017) investigated whether there is a speculative bubble

forming within the U.S. technology market through an investigation of IPO underpricing levels.
IPOs completed between January 2010 and November 2016 were investigated. The study
revealed that during that period, IPO underpricing levels were above long terms averages and
that technology and venture backed companies experienced increased underpricing. These
increases, however, were not as excessive as the levels noted during the Dot-com bubble
period. In the study, overall market factors such as the increased level of venture capital
investment levels and the appearance of unicorn companies were also mentioned as possible
indicators of a new technology bubble.

45
Figure 9: Summary of empirical literature on the possibility of a new technology bubble.

Technical and Fundamental

Analysis of U.S Indices:
*van de Hoef (2011)*
*Christoffersen and Gulbrandsen
(2011)*
*Lienkamp and Koepsell (2015)*

Overall Technology
Initial Public Offerings Market Analysis
Underpricing
*Christoffersen and
*Sousa and Pinho (2014)* Gulbrandsen (2011)*
*Van Ooteghem (2016)* *Van Ooteghem (2016)*
*Paping (2017)* *Paping (2017)*

Source: Researcher’s own deductions

From the figure above it can be noted that previous studies investigating the possibility of a
second Dot-com bubble or a new speculative bubble forming within the U.S. technology
market covers various areas of investigation. It is also evident that these historical studies
cover one or more areas but not all areas of possible investigation.

In terms of the technical and fundamental analysis of U.S. indices, the latest study by
Lienkamp and Koepsell (2015) only included one technology index while the broader study by
Christoffersen and Gulbrandsen (2011) which utilised multiple technology indices, with their
data sample ending in 2011, is dated and does not reflect the latest information. Furthermore,
the studies by Van Ooteghem (2016) and Paping (2017) related to the overall market factors
which could contribute to the possible formation of a new speculative bubble, only include a
limited number of considerations such as levels of venture capital investment and the
appearance of unicorn companies.

46
2.11 CONCLUSION

This section set out to review the existing literature surrounding the possibility of a new
speculative bubble within the U.S. technology market, that would be similar to the speculative
Dot-com bubble during the 1990s.

Speculative bubbles occur when there is a sharp rise in asset prices which are sustained by
investor enthusiasm rather than estimations of fundamental value. Their formation follows a
similar pattern as introduced by the Kindleberger-Minsky model and are caused by mainly two
overall factors: Excess liquidity and investors displaying behavioural finance traits such as
overconfidence and herding. These bubbles challenge the philosophical fundamentals to
finance and investing such as the Efficient Market Hypothesis, which is based on investor
rationality. In order to gain insight and clarify the emergence of bubbles, the greater fool theory
and elements of behavioural finance is presented which highlights that investors are not
always rational.

It becomes evident that speculation resulting from innovations such as new exotic tulip bulbs,
new trading opportunities or technological advances, in combination with the ample supply of
credit and liquidity, leads to investor enthusiasm which drives up share prices causing the
notable historical bubbles. Subsequently, background relating to venture capital investment
and the increased levels noted during the historical Dot-com bubble were provided and the
resulting emergence of private companies with excessive valuations, known as unicorns, was
introduced. This was followed by information relating to the Initial Public Offering (IPO) process
and the emergence of the IPO underpricing phenomenon and the various causes for this.
Background relating to the U.S. stock market and related indices was provided and the U.S.
stock market confidence indices which decreased during the Dot-com bubble period were
discussed.

In the subsequent section a review was provided on the identification methods relating to
speculative bubbles. Within U.S. capital markets, high volatility in share prices, the presence
of high valuation ratios and low confidence in stock market valuations by investors provides
evidence of a possible speculative bubble. During the Dot-com bubble, high levels of IPO
underpricing were also noted, due to investor optimism. Another characteristic noted during
previous bubbles is that their rapid growth and acceleration was associated with the expansion
of credit and money. Thus, favourable low interest rates and increasing levels of venture
capital investment are contributing factors to the possible appearances of economic bubbles.

47
The last section within this chapter evaluated the empirical literature relating to the possibility
of a second Dot-com bubble or a new speculative bubble forming within the U.S. technology
market. From this analysis it was noted that historical studies and their investigation can be
categorised into the following areas: Technical and fundamental analysis of U.S. indices, an
investigation of Initial Public Offerings (IPO) underpricing levels and an overall analysis of the
technology market. It was also noted that multiple historical studies limited their focus to one
or two of the multiple areas of possible investigation, the data was dated or provided only
partial coverage of certain areas of investigation that were conducted.

The above factors provide substantial evidence that further research relating to the
identification of potential speculative bubbles can be conducted. This will not only provide
researchers and investors with updated information but will also add to the existing literature
relating to the possibility of a new speculative bubble within the U.S. technology sector.

48
CHAPTER 3: RESEARCH METHODOLOGY

3.1 INTRODUCTION

In the preceding chapter, a literature review related to the study was provided. It was noted
through the evaluation of empirical literature on the possibility of a new technology bubble that,
three areas of investigation exist. These areas include a technical and fundamental analysis
of U.S. indices, an investigation of Initial Public Offerings (IPO) underpricing levels and an
overall analysis of the technology market. This study will thus, in an attempt to provide a
complete investigation on whether the current conditions and market dynamics contribute to
the existence of a possible new bubble within the U.S. technology market, include all areas of
investigation.

The following chapter will explain the research methodologies that were utilised as part of this
research study, to answer the research questions. Research was defined by Anderson and
Arsenault (2005) as a problem-solving activity which aims to answer questions through the
collection and analysis of data for the purpose of testing a hypothesis or explaining
phenomena.

The research strategy and the research design will be presented in the first two sections of
this chapter. This includes the data collection method and data analysis, which comprises the
largest section within this chapter. This is followed by a section detailing the methodologies to
be applied within this study. The chapter is concluded with a discussion of the validity and
reliability of the data, the limitations of the study and finally the ethical considerations.

3.2 RESEARCH STRATEGY

Saunders, Lewis and Thornhill (2015) defined a research strategy as “a plan of how a
researcher will go about answering her or his research questions”. On a similar note, research
strategy according to Remenyi, Williams, Money and Swartz (2010), provides the researcher
with the overall direction of the research, including the process whereby the research is
conducted. Thus, the research strategy provides structured guidance to the researcher, to
address the research questions, as set-out in the study.

Saunders et al. (2015) mentioned that the choice of research strategy would be based on
several factors such as, the research questions and objectives, the extent of existing
knowledge on the subject area to be researched, access to the data sources and the
philosophical underpinnings of the researcher. Section 3.2.1. below outlines the overall

49
problem statement, the research questions and research objective which flow from this
statement, followed by the research paradigm and research method.

3.2.1 Research questions

The aim of the study is to determine whether the current conditions and market dynamics
contribute to the existence of a new technology bubble within the U.S. technology market. In
order to address the overall research problem, the following research questions were
formulated:

1. Do the U.S. technology indices currently deviate in a similar pattern from the overall U.S.
market indices, as noted during the Dot-com bubble period?
2. Are the current levels of IPO underpricing comparable to the levels of IPO underpricing
noted during the Dot-com bubble period?
3. Are similar overall U.S. technology market conditions which contributed to the
development of the Dot-com bubble present currently?

3.2.2 Research objectives

The research objectives that will address the research questions aimed to be answered within
this study are listed below and are also graphically illustrated below:

Technical and fundamental analysis of U.S. Indices

To determine whether a similar bubble pattern compared to that of the Dot-com bubble can
be identified through the use of technical and fundamental analysis of U.S. technology indices
which are benchmarked against overall U.S. market indices.

Initial public offerings (IPO) underpricing

To determine whether the current levels of IPO underpricing is comparable to that noted during
the Dot-com bubble period, in order to establish the existence of a possible new bubble.

U.S. technology market analysis

The analysis intends: to investigate whether the current conditions within the U.S. technology
market such as federal interest rates and levels of venture capital investment are comparable
to the conditions present during the Dot-com bubble period, in order to establish whether these
might contribute to a possible new bubble.

50
The figure below illustrates the subdivision of the overall problem statement into three
research questions and their underlying research objectives.

Figure 10: Graphical illustration of the overall subdivision of the study from the overall
problem statement.

Overall problem statement: Do the current conditions and market

dynamics contribute to the existence of a possible new bubble within
the U.S. technology market?
Research question 1: Do the Research question 3: Are
Research question 2: Are the
U.S technology indices currently similar overall U.S. technology
deviate in a similar pattern from current levels of IPO underpricing market conditions which
comparable to the levels of IPO
the overall U.S. market indices contributed to the development
underpricing noted during the Dot-
as noted during the Dot-com of the Dot-com bubble present
com bubble period?
bubble period? currently?

Research objective 1: Research objective 2: Research objective 3:

Technical and Fundamental Initial Public Offerings (IPO) U.S. Technology Market
Analysis of U.S. Indices Underpricing Analysis

Formulation of relating
hypotheses

Source: Researcher’s own deductions

3.2.3 Research paradigm

A research paradigm is the underlying manner whereby a researcher views the world and the
relationship between the researcher and his/her approach to the research problem (O’Dwyer
and Bernauer, 2013). One of the two main paradigms which form the basis of research and is
based on physical sciences is known as the positivist approach. The positivist approach rests
on the assumption that observable social reality as perceived through the senses can be
accurately described and explained through facts and laws derived from the physical and
natural sciences (Remenyi et al., 2010).

In terms of a research methodology, positivism implies the use of a quantitative methodology

as it seeks to test and confirm theories through the use of empirical validation and statistical
analysis (Bisman, 2010). Quantitative research is defined by Watson (2015) as the systematic
investigation of phenomena, using statistical or numerical data to formally test theories by
formulating hypotheses and applying statistical analyses. A positivism research approach will
thus be employed to this study as the research questions and the underlying hypothesis will
be tested through the use of quantitative methods.

51
3.2.4 Research method

The research method that will be utilised in this study is quantitative empirical analysis as it is
based on secondary data. Secondary data refers to data that have already been collected by
other sources and is readily available. By contrast, primary data is original data collected by
the individual conducting the research (Juneja, 2020). The advantages of utilising secondary
data are the low costs and the fact that the data is usually professionally collected, cleaned
and maintained within reputable databases which can be accessed for a low fee (Cheng and
Phillips, 2014).

The secondary data employed in this study relates to historic time series data, historical IPO
data and macroeconomic data relating to the technology market which was analysed; and any
relating interactions between the data that was reviewed to address the research objectives
and underlying hypotheses. The historical time-series data was collected from the Bloomberg
database and the historical IPO data was collected from the Thomson Reuters Eikon database
and the macroeconomic data relating to the technology market is listed in the section below.

3.3 RESEARCH DESIGN

A research design serves as the blueprint for the collection, measurement and analysis of data
and the design should include an outline which describes in detail how the intended research
should be conducted (Kothari, 2004).

Quantitative research designs fall broadly within two categories, non-experimental and
experimental research designs. A non-experimental research design relates to a technique of
conducting quantitative research where there is no manipulation of any variable within the
study; whereas an experimental research design is where the researcher is required to
incorporate an element of intervention or altering conditions in order to study causality
between variables (Mertler, 2018). The quantitative research design which will be applied in
the study can be characterised as a non-experimental research approach as the secondary
numerical data collected was not manipulated and no conditions were altered.

Mertler (2018), described three different types of non-experimental research designs which
are descriptive research, correlation research and causal-comparative research. Within
descriptive research, the researcher simply studies the phenomenon of interest as it occurs
naturally and describes or interprets its current status without manipulating conditions or
events. The purpose of correlation research is to discover and measure the relationships
between two or more variables. In a correlation study, the researcher examines whether and

52
to what extent a statistical relationship exists between two or more variables and is typically
utilised to describe current or historical conditions. Causal-comparative research designs are
utilised when researchers explore the reasons or possible causes behind existing differences
between two or more groups. This research design aims to determine possible conditions that
might have resulted in the observed difference.

In terms of the first research question which relates to the technical and fundamental analysis
of U.S. indices, the research design which will be implemented is characterised as descriptive
and in terms of the second research question which relates to the IPO underpricing
investigation, this is characterised as correlational. The third research question which relates
to the overall U.S. technology market analysis, is characterised as descriptive. This will be
discussed further in the sections below.

3.3.1 Technical and fundamental analysis of U.S. indices

The research design that is applied within this section of the study can be characterized as a
descriptive non-experimental research approach; as historical numerical data (predictor
variable) which cannot be manipulated, is collected in order to provide an explanation of the
results obtained (Jalil, 2013). The methods utilised for the purposes of the collection and
analysis of the quantitative data are discussed in the subsequent sections.

3.3.1.1 Data collection method

Data for the purpose of the technical and fundamental analysis of the U.S. indices was
collected from Bloomberg. Bloomberg is the world’s leading provider of financial data and
news. Bloomberg contains current and historical financial data, provides data analysis tools
and is widely utilised by colleges and universities (Scott III, 2010).

3.3.1.2 Data collected

The data collected which was utilised in the technical and fundamental analysis of the U.S.
indices is secondary time series data. A time series dataset comprises observations of one or
multiple variables within a selected time frame. The time series dataset is arranged in
chronological order and the frequency of the observations can vary; such as annually,
biannually, quarterly, monthly, weekly, daily or hourly, depending on the requirements of the
study (Asteriou and Hall, 2015).

53
In terms of the analysis of the U.S. indices’ weekly price data was obtained for the following
U.S. indices:

• NASDAQ Composite Index (CCMP).

• NASDAQ Computer Index (IXK).
• NYSE Arca Tech 100 Index (PSE).
• S&P500 Information Technology Sector Index (S5INFT).
• NASDAQ-100 Technology Sector Index (NDXT).
• S&P 500 Index (SPX).
• Dow Jones Industrial Average Index (INDU).

The following monthly data fundamentals were also obtained for the above U.S. indices, where
this was available:

• Trailing 12-month earnings per share (EPS).

• Price-to-earnings ratio (P/E).
• Price-to-book ratio (P/B).
• Price-to-sales ratio (P/S).

The time period selected for the abovementioned U.S. indices weekly and monthly data was
from 01 January 1996 to 31 December 2001, as well as 1 January 2014 to 31 December 2019.
In terms of the NASDAQ-100 Technology Sector Index, as this index was only introduced
during February 2006, weekly and monthly data was only obtained for the later period stated
above. The period 1 January 1996 to 31 December 2001 was selected as this six-year period
was considered to be the timeframe related to the historical Dot-com bubble. The period 01
January 2014 to 31 December 2019 was selected as this is the most recent time series data
which also spans a similar six-year period noted with the Dot-com bubble.

3.3.1.3 Data analysis

Saunders et al. (2015) described data analysis as the action whereby data is prepared and
processed in order to identify and confirm relationships and trends. The data analysis of the
time series data of U.S. indices and their relating fundamental data mentioned above, obtained
from Bloomberg, was analysed in terms of standard descriptive statistical metrics. The
statistical analysis of the historical times series data relating to the period 1996 to 2001 and
the period 2014 to 2019 can be referred to within Appendix 1 and Appendix 2 of this study,
respectively.

54
3.3.2 IPO underpricing

The research design that is applied within this section of the study can be characterized as a
correlational non-experimental research approach, as the aim is to discover and measure the
relationships between variables (certain IPO characteristics), in order to describe current
conditions. The methods utilised for the purposes of the collection, cleaning and analysis of
the quantitative data are discussed within the subsequent sections.

3.3.2.1 Data collection method

Data relating to IPO underpricing was collected from the Thomson Reuters Eikon database.
This database is a premium desktop product for financial professionals and is a leading source
of global real-time financial data and content sourced from multiple data sources such as
brokers, exchanges and specialist data providers across all financial markets (Eikon, 2018).

3.3.2.2 Data collected

In terms of IPO underpricing investigations, the sample data collected comprised firms
completing an initial public offering (IPO) between January 2014 and December 2019. This
list of companies was created by using the Thomson Reuters Eikon database and filtering for
U.S. based companies performing IPOs on U.S. exchanges and IPOs which were priced (an
IPO where the deal terms and final price range are finalised and will list on an exchange) as
defined within the Reuters database. The Reuters database listed a total of 1108 IPOs within
that period, which can be identified by their unique International Securities Identification
Number (ISIN) code. The ISIN code is a unique 12 character code which is universally
recognised and is used to identify equities, commodities, debt instruments, derivatives and
entitlements such as rights and warrants (ISIN, 2020).

The IPO listing extracted from the Reuters database was validated by comparing this to the
listing of IPOs maintained by IPOScoop.com LLC, which is an independent firm researching
and predicting IPOs opening-day performances. IPOScoop.com started in 2006 and their
current subscribers include investment bankers, foreign banks, investment advisory firms and
one of the largest professional firms in the world, Ernst and Young. IPOScoop.com data was
utilised by Junarsin (2011) and Ahlroos (2019) in their studies of initial public offerings.

3.3.2.3 Data cleaning

The initial dataset to be utilised for the IPO underpricing investigation, as described in the sub-
section above was cleansed in line with the researched performed by Loughran and Ritter

55
(2004) and Ritter (2020). Firstly, all U.S. based companies performing an IPO on foreign
exchange, real-estate investment trusts (REIT’s) and limited partnerships were removed. All
over the counter (OTC) or penny stocks with an offer value of less than five US Dollars were
removed from the dataset.

Financial institutions such as commercial banks and investment trusts performing IPOs were
also removed from the dataset, based on their Standard Industrial Classification (SIC) codes,
as their IPOs are bounded by different regulations. The SIC system utilises a four-digit code
in order to classify a company or organisation within a particular industry, based on its primary
business (Business Information & Industry Classification Experts, 2020). Financial institutions
fall into the SIC code range of 6000 to 6399 and 6700 to 6799, as defined by Ljungqvist and
Wilhelm (2003).

The identification of technology companies was based on the researched performed by

Loughran and Ritter (2004) and updated by Ritter (2020). This was verified by the research
performed by Kile and Phillips (2009) relating to the optimal three-digit SIC code used to
sample high technology companies. Refer to Appendix 3 for further detail.

After cleansing the dataset as described above, the finalised dataset of U.S. based IPOs
through the utilisation of the Reuters database contained the IPO date, founding date,
proceeds, market capitalisation at the offer date and stating whether the company is venture
backed or not. Table 1 below provides further detail relating to the initial and final IPO dataset,
as discussed in the section above.

Table 1: Initial and final dataset of U.S. based IPO data collected from Thomson Reuters
Eikon database.

2014 2015 2016 2017 2018 2019 Total

Initial IPO dataset total 272 172 109 177 192 186 1108

Final IPO dataset total 170 108 74 97 128 100 677

Technology IPOs 51 33 21 26 32 27 190

Non-technology IPOs 119 75 53 71 96 73 487

Fraction technology IPOs 30% 31% 28% 27% 25% 27% 28%

Source: Thomson Reuters Eikon and researchers’ own deductions

56
Figure 11 below provides further detail relating to the composition of the final dataset as
described above relating to technology and non-technology IPOs by year.

Figure 11: IPO data description based on the final dataset by calendar year.

Source: Thomson Reuters Eikon and researchers’ own deductions

3.3.2.4 Data analysis

The descriptive statistics relating to the cleansed and finalised dataset of U.S. based IPOs is
presented in the table below.

Table 2: Descriptive statistics relating to finalised dataset of U.S. based IPO data
collected from the Thomson Reuters Eikon database.

Variable Mean Median Minimum Maximum Standard

deviation

Gross proceeds (USD million) 229.65 110.40 3.49 8 100.00 470.83

Offer price (USD) 14.76 15 5 72 5.87

Underpricing (%) 17.54 8.07 (41.08) 231.25 32.49

Market capitalisation (USD million) 1 131.03 385.60 4.68 75 213.00 3 453.52

Age (Years) 13.75 9.00 1.00 187.00 20.05

Source: Thomson Reuters Eikon and researcher’s own deductions

57
The average gross proceeds of U.S. based IPOs between the period 2014 to 2019 is 229.65
million U.S. Dollars. The maximum proceeds raised was by Uber Technologies Inc. with 8.1
billion U.S. Dollars and the lowest proceeds were raised by BeyondSpring Inc with 3.49 million
U.S. Dollars. As these maximum and minimum gross proceeds are widespread, this leads to
the high standard deviation of 470.82 million U.S. Dollars. The average offer price of the IPOs
is 14.76 U.S. Dollars. The minimum offer price of five U.S. Dollars relates to various IPOs
throughout the population period and the maximum offer price of 72 U.S. Dollars belongs to
Lyft Inc.

Between the period 2014 to 2019 the average level of IPO underpricing was 17,54% and
during this period, there was a widespread in underpricing levels. The maximum level of
231.25% relates to the IPO of Monopar Therapeutics Inc and the minimum level of -41.08%
relates to the IPO of Funko Inc, which contributes to the high standard deviation of 32.49%
noted above. The market capitalization of the of the IPO dataset was very widespread, which
caused the high standard deviation of 3.45 billion U.S. Dollars; with the maximum of 75.21
billion U.S. Dollars belonging to Uber Technologies Inc and the minimum of IMAC Holdings
Inc of 4.68 million U.S. Dollars. The average age of the U.S. based companies at IPO is 13.75
years of which the youngest relates to 25 companies within the population and the oldest of
187 years belonging to PQ Group Holdings Inc.

3.3.3 U.S. technology market analysis

Similarly, to the research design relating to the technical and fundamental analysis discussed
in Section 3.3.1, the research design that is applied within this section of the study can be
characterized as a descriptive non-experimental research approach as numerical data, which
cannot be manipulated, and is collected and evaluated to provide an explanation of the results
obtained. The methods utilised for the purposes of the collection and analysis of the
quantitative data are discussed in the subsequent sections.

3.3.3.1 Data collection method

The data relating to the analysis of the historical U.S. federal interest rates was collected from
Macrotrends. The data obtained from Macrotrends was utilised in several recent academic
studies such as Hope (2015), Bouwer (2019) and Al Kibaida and Nobanee (2020). In terms of
the U.S. stock market confidence index data, this was obtained from the Yale School of
Management along with their interactive graphs. The survey data collected by the Yale School
of Management which is supervised by Nobel Laureate in economics sciences Professor
Robert Shiller is also supported by grants from the U.S. National Science Foundation (Yale
School of Management, 2020a)

58
Data utilised within the venture capital analysis was collected from the PwC/CB Insights
quarterly MoneyTree Report. This report contains historical trend data and updates on the
U.S. venture capital investment and high growth start-ups ecosystem. This report is the
definitive source of information on venture capital investments in emerging companies and is
a staple of the financial community, entrepreneurs, government policymakers and worldwide
business media (PwC, 2020).

Data collected relating to overall information relating to U.S. based unicorn companies was
retrieved from Pitchbook Data’s 2019 Unicorn Report. This report contains historical data
relating to U.S. based unicorn companies with details regarding investment trends and the
relating effect on the creation of unicorn companies. Pitchbook is a financial data and software
company, serving thousands of business professionals with comprehensive data on private
and public markets (Pitchbook Data, 2019).

Data related to the previous and current individual U.S. based technology unicorn companies
and their underlying valuation information was collected from CB Insights. CB Insights is a
technology market platform that analyses data relating to venture capital, start-up companies
and relating news. This platform was cited by the financial press more than 4000 times during
2017 and 2018 respectively, and is utilised by intelligence analysts and a global network of
executives (CB Insights, 2020).

3.3.3.2 Data collected

The historical daily levels relating to the federal funds rate was obtained from 1954 to 2019 as
determined by the Federal Open Market Committee (FOMC). This data was utilised in the
analysis of the historical FED rates as part of the overall U.S. market analysis. The data
collected in terms of the U.S. stock market confidence index analysis was obtained for the
period January 2014 to September 2020. This data was obtained for both the U.S. crash
confidence index and the U.S. valuation confidence index

In terms of analysis of U.S. venture capital investments, the sample data collected consists of
the total U.S. venture capital investment and relating number of deals beginning in quarter one
of 1995 until the second quarter of 2020. The data also includes U.S. capital invested and the
number of deals per quarter subdivided within industry sectors for the same period.

Information relating to U.S. based unicorn companies consisted of aggregated data relating to
the number, valuation, industry and venture capital raised from 2009 to June 30, 2019. This
data was contained within the Pitchbook Data’s 2019 Unicorn Report and corresponding data
workbook. Information relating to individual previous and current U.S. based unicorn

59
companies was obtained from CB Insights. The data obtained consisted of the founding dates,
the total funding obtained, the latest private valuation, estimated annual sales and public
information such as EPS and Market Capitalisation.

3.4 METHODOLOGY

The main methodologies that will be utilised within this study are a quantitative empirical
analysis of the listed technology market and the IPOs of U.S. based technology companies,
followed by a more descriptive analysis for the overall U.S. technology market.

The quantitative empirical analysis that will be applied is divided into two different parts. The
first part includes a technical analysis and fundamental analysis of different U.S. indices that
represent listed companies that fall within the technology sector. The second part relates to
the underpricing of U.S. based companies performing an IPO on U.S. exchanges.

In this section, the technical analysis of indices including a motivation of the chosen indices
and the ratios which are utilised within the fundamental analysis of the chosen indices will be
considered. As part of the IPO underpricing analysis, the formula relating to the calculation of
IPO underpricing is presented. This is followed by the utilised statistical analysis tools and the
dependent and independent variables of the IPO characteristics within the regression model.

3.4.1 Technical analysis of indices

Technical analysis is a method of evaluating shares by analysing the statistics generated by

stock market activity, such as past prices and volume. Technical analysis looks at the price
movement of shares and uses this data to predict its future price movements (Kirkpatrick and
Dahlquist, 2010).

Technical analysis will be employed to identify and evaluate trends and patterns in the index
price developments between 1996 to 2001, considered to be the timeframe related to the
historical Dot-com bubble and the period 2014 to 2019, the most recent time series data which
also spans a similar six-year period noted with the Dot-com bubble.

Additionally, the index price development for the above periods is compared to the relating
trailing 12-month earnings per share (EPS) of the index. As stated by Khan, Islam, Choudhury
and Adnan (2014), EPS is generally considered the most important metric in determining the
valuations of the underlying listed companies which constitutes the index.

60
EPS is often used as a barometer to gauge a company’s profitability per unit of shareholder
ownership and can be calculated using the following formula:

𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

𝐸𝑃𝑆 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠

Source: (Khan et al., 2014)

The trailing 12-month earnings per share of the index takes into consideration the previous 12
months earnings of the companies which constitutes the index, divided by the average number
of shares for the same period (Fidelity Investments, 2020).

Technical analysis will be applied to the following indices:

3.4.1.1 NASDAQ Composite Index (CCMP)

The NASDAQ Composite Index was established in 1971 and is one of the most followed
indices in the United Sates. The index is a capitalization-weighted index, which means that
U.S. listings with the largest market capitalization exert the greatest impact on the final value
of the index. The NASDAQ Composite is used mainly to track technology shares as the
majority of the companies listed on the index are technology and internet companies
(Corporate Financial Institute, 2020b).

The NASDAQ Composite Index was selected based on the fact that this index and its price
developments was largely referred to in media reports and academic literature relating to the
Dot-com bubble and that this index is heavily weighted towards technology and internet
companies. This index was also present during the Dot-com bubble period and during 2014
to 2019, which is the most recent time series.

3.4.1.2 NASDAQ Computer Index (IXK)

The Nasdaq Computer Index began on November 1, 1993 and contains shares of NASDAQ-
listed companies classified as Technology excluding Telecommunications Equipment. They
include computer services, internet, software, computer hardware, electronic office equipment
and semiconductors. The NASDAQ Computer index is a market capitalization-weighted index
(Nasdaq Inc, 2020). This index was selected based on its exclusive focus on technology
companies and its reference within academic literature relating to the Dot-com bubble. This
index was also present during both the Dot-com bubble period and during the period 2014 to
2019.

61
3.4.1.3 NYSE Arca Tech 100 Index (PSE)

The NYSE Arca Tech 100 Index is a price weighted index which means that companies with
the largest share price exert the greatest impact on the final value of the index. The index
comprises technology-related companies listed on US stock exchanges. The objective of this
technology index is to provide a benchmark for measuring the performance of companies
using technology innovation across a broad spectrum of industries. The NYSE Arca Tech 100
Index has a proven track record with historical data being available from February 1984 to
date (NYSE, 2018). This index was selected based on its extensive focus on technology
companies and that it is a performance benchmark for technology companies. This index is
also present during both the Dot-com bubble period and during the period 2014 to 2019.

3.4.1.4 S&P500 Information Technology Sector (S5INFT)

The S&P500 Information Technology Sector Index comprises companies included within the
S&P500, classified as members of the information technology sector. This index was valued
in September 1989 and is a subindex of the S&P500. Thus, it mirrors the weighting
methodology of the S&P500. The S&P500 is a world-renowned index and the first U.S. market
capitalization-weighted index, which includes the 500 top U.S. companies in leading industries
(S&P Dow Jones Indices LLC, 2020). This index was selected based on its exclusive focus
on companies within the information technology sector and this index was also present during
both the Dot-com bubble period and during the period 2014 to 2019.

3.4.1.5 NASDAQ-100 Technology Sector (NDXT)

The NASDAQ-100 Technology Sector Index is an equal weighted index which means that that
all companies, irrespective of share price or market capitalization exert an equal impact on the
final value of the index. This index was introduced in February 2006 and was designed to
measure the performance of companies that are classified as technology companies,
according to the Industry Classification Benchmark (ICB) system (Nasdaq Inc, 2020). This
index was included in our analysis in order to cover a broader scope of trends and patterns
within the technology sector, notwithstanding the limitation of the availability of data from
February 2006 onwards.

3.4.1.6 Benchmarking of the technology indices

The indices listed above that will be evaluated during technical analysis will be benchmarked
against indices that represent the overall U.S. stock market, the Standard & Poor 500 Index
(SPX) and the Dow Jones Industrial Average Index (INDU). The use of benchmarking will
enable one to identify how the technology market diverges from the overall market during the
period under review.

62
Both the S&P 500 and the Dow Jones Industrial Average index are included in the analysis
and are used as an overall benchmark for the U.S. market, as described within Section 2.7.3
of this study. This is based on the fact that both the indices are highly esteemed and frequently
referred to as a market baseline in academic literature and financial media relating to historical
bubbles which includes the Dot-com bubble and other financial anomalies.

3.4.2 Fundamental analysis of indices

Fundamental analysis is a method of evaluating an equity by attempting to measure its intrinsic

value. In other words, fundamental analysis is about using real data to evaluate an equity’s
value. The method uses revenue, earnings, future growth, return on equity, profit margins and
other data to determine a company’s underlying value and potential for future growth (Kumar,
Mohapatra and Sandhu, 2013).

In order to identify and evaluate trends and patterns in the fundamental values of the indices
between the Dot-com bubble period and the period 2014 to 2019, the ratio values commonly
utilised within fundamental analysis for was obtained. The fundamental ratios for the
technology indices will be benchmarked against the fundamental ratios of the Standard & Poor
500 Index (SPX) and the Dow Jones Industrial Average Index (INDU). Information relating to
the relevant ratios that were selected to be included within the fundamental analysis of the
indices, is provided below:

3.4.2.1 Price-to-earnings ratio (P/E)

The (P/E) ratio is the most widely used valuation tool in equity markets. Analysts use it to
measure the relative market value of a company’s equity compared to its underlying earnings
in order to indicate over or undervaluation. This metric is also used when comparing listed
companies within an industry or compared to a market benchmark. Many investors are
prepared to pay a premium for high growth expectations in the form of a high P/E ratio. The
P/E ratio serves as an important indicator used within the fundamental analysis to estimate
the intrinsic value of shares and is calculated by using the following formula (Gottwald, 2012):

𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

𝑃⁄𝐸 𝑟𝑎𝑡𝑖𝑜 =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Source: (Gottwald, 2012)

63
During the Dot-com bubble, investors justified the valuations of Dot-com companies beyond
their fundamental valuation metrics such as price/earnings and price/sales, simply based on
the fact that these companies were attributed to the new opportunities that came with the
internet (Luenendonk, 2019). The P/E ratio was selected based on the fact that this ratio is
highly esteemed and frequently referred to in academic literature and financial media as an
intrinsic value deviations indicator relating to the Dot-com bubble and any current market
dynamics.

3.4.2.2 Price-to-sales (P/S)

The price-to-sales (P/S) ratio, is utilised by analysts in order to measure the total value that
investors place on a company, compared to the total revenue generated by the company. The
ratio provides a valuation on the operations of the company and helps determine if new
companies who have yet to turn a profit or have a low net income are undervalued or
overvalued. The price-to-sales ratio is calculated by using the following formula (Corporate
Financial Institute, 2020c):

𝑀𝑎𝑟𝑘𝑒𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛
𝑃⁄𝑆 𝑟𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑝𝑎𝑠𝑡 12 𝑚𝑜𝑛𝑡ℎ𝑠

Source: (Corporate Financial Institute, 2020c)

The ratio was widely referred to during the first Dot-com bubble, as many of the technology
companies which performed an IPO did not have sufficient revenues or reported negative
earnings and therefor the relating P/E ratio could not be calculated (de Pinho, 2013). This ratio
was selected as it is useful in determining whether there is under- or over-valuation within the
technology companies, compared to the overall industry.

3.4.2.3 Price-to-book (P/B)

The price-to-book value ratio is a valuation ratio that is used by investment advisors, fund
managers and investors to compare a company’s market value (Market capitalization) to its
shareholders’ equity. The price-to-book value ratio, which is expressed as a multiple, reflects
the value that investors attach to a company’s equity relative to the book value of its equity. A
high P/B ratio is an indicator of overvaluation and shows that a premium is paid by investors
for the net assets of a company (Marangu and Jagongo, 2014). This ratio is calculated as
follows:

64
 𝑀𝑎𝑟𝑘𝑒𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛
𝑃⁄𝐵 𝑟𝑎𝑡𝑖𝑜 =
𝑁𝑒𝑡 𝑎𝑠𝑠𝑒𝑡𝑠

Source: (Marangu and Jagongo, 2014)

The price-to-book ratio increased significantly during the Dot-com bubble period, indicating a
gap between the company’s size and its market value. The ratio is a useful tool for policy-
makers, like governments and central banks for the evaluation and detection of share market
bubbles (Mizuno, Ohnishi and Watanabe, 2016). The price-to-book ratio is selected based on
the fact that this metric is widely utilized in fundamental analysis and any overvaluation of
shares will be reflected within the ratio of indices selected above.

3.4.3 IPO underpricing

Ritter and Welch (2002) stated that the method of calculating the level of IPO underpricing, is
by taking the percentage difference between the issue/offer price and the first day closing
price. Academics use the term underpricing or first day return interchangeably. Underpricing
is calculated by using the following formula:

(𝑓𝑖𝑟𝑠𝑡 𝑑𝑎𝑦 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 − 𝑜𝑓𝑓𝑒𝑟 𝑝𝑟𝑖𝑐𝑒)

𝑈𝑛𝑑𝑒𝑟𝑝𝑟𝑖𝑐𝑖𝑛𝑔 = × 100%
𝑜𝑓𝑓𝑒𝑟 𝑝𝑟𝑖𝑐𝑒

Source: (Ritter and Welch, 2002)

The hypotheses formulated relating to the IPO underpricing investigation will be tested by
utilising the following student’s t-test:

𝑥̅ − 𝜇
𝑡𝑒𝑠𝑡 𝑠𝑡𝑎𝑡𝑖𝑠𝑡𝑖𝑐 = ~𝑡[𝑑𝑓 = 𝑛 − 1]
𝑆O
√𝑛

Source: (Lumen, 2020)

The following regression model is used in order to test the hypotheses relating to the
technology IPO characteristics by adding the following two independent variables:

𝑈𝑛𝑑𝑒𝑟𝑝𝑟𝑖𝑐𝑖𝑛𝑔 = 𝛼 + 𝛽1 ∗ (𝐴𝑔𝑒) + 𝛽2 ∗ (𝑉𝑒𝑛𝑡𝑢𝑟𝑒 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐵𝑎𝑐𝑘𝑒𝑑) + 𝜖!

In terms of the age independent variable, this is calculated by the difference between the
founding year of the company and the date of the listing of the IPO. The venture capital backed
independent variable relates to whether the company is venture backed or not, (1 being the
company is venture backed).

65
3.5 VALIDITY AND RELIABILITY OF DATA

3.5.1 Validity

Validity in qualitative research refers to the extent to which what we measure reflects what we
expected to measure, thus if the analysis tools measures what it is expected to measure, then
this is viewed as valid (Anderson and Arsenault, 2005). The analysis tools utilised within this
study were Excel and the relating add-ins such as Analysis ToolPak and Solver Add-in which
included the student’s t-test and OLS Regression tool, which are all reputable tools used in
econometric analysis.

3.5.2 Reliability

Reliability in qualitative research suggests that the data utilised within the study must be
reliable and that different researchers would achieve the same conclusions and results if they
were exposed to identical situations (Anderson and Arsenault, 2005). Thus, the two aspects
relating to reliability are the reliability of the data sources and the study’s ability to be duplicated
and repeated by another researcher. The data collected which was utilised in the technical
and fundamental analysis of the U.S. indices was collected by utilising the Bloomberg
database. This tool and database should produce similar time series data compared to another
reliable reputable source.

The data relating to IPO underpricing investigation was obtained by utilising the Thomson
Reuters Eikon database. Tables 3 and 4 below compare the final dataset of IPOs and final
dataset of technology IPOs respectively, with that of Ritter (2020). This dataset has been
utilised within the following historical research: Nielsson and Wójcik (2016), Pinheiro et al.
(2016), and Bowen, Frésard and Hoberg (2019); and is thus the most reliable and complete
dataset to compare to:

Table 3: Final dataset of IPOs comparison to dataset by Ritter 2020

2014 2015 2016 2017 2018 2019 Total

Final IPO dataset total 170 108 74 97 128 100 677

Ritter 2020 IPO dataset 206 118 75 107 134 112 752

Dataset coverage 83% 92% 99% 91% 96% 89% 90%

Source: (Ritter, 2020) and researcher’s own deductions

66
On an overall basis is it evident from the table above that a high level of coverage with 90%
of the combined total was achieved. The 2014 period and 2019 period were the only periods
in which the coverage falls below 90%, however for the periods 2015 to 2018 the coverage
extends to over 90% in each respective calendar year.

Table 4: Final dataset of technology IPOs comparison to dataset by Ritter 2020

2014 2015 2016 2017 2018 2019 Total

Technology IPOs 51 33 21 26 32 27 190

Ritter 2020 technology IPOs 51 38 21 30 39 36 215

Dataset coverage 100% 87% 100% 87% 82% 75% 88%

Source: (Ritter, 2020) and researcher’s own deductions

For the 2014 and 2016 year, the final dataset to be utilised within this study and Ritter’s
samples match perfectly and on an overall basis comprises 88% of his sample, thus showing
a high level of comparative basis.

Data collected relating to the overall U.S. technology market analysis was collected from
reputable external sources and databases as mentioned in Section 3.3.3 above. The data is
publicly available, and the databases are maintained by financial and industry professionals.

The second aspect of reliability relates to whether analysis within this study can be replicated.
The methodology applied within this study is based on methodologies which have been
applied in similar studies and other literature which was discussed in Chapter 2 under
empirical literature on the technology bubble.

3.6 LIMITATIONS

The limitations relating to the study is the dataset that was utilised as part of the study. The
time-series data which was collected was limited to specific indices and selected fundamental
ratios. The second limitation is based on the historical IPO data that was collected. This was
limited to U.S. based IPOs and no other regions were considered.

Another limitation that is created by the data utilised was the timeframe selected for the time-
series data and the IPO data. The time frame selected reflects the timeframe relating to the
historical Dot-com bubble during 1996 to 2001 and the period 2014 to 2019.

67
Within these limitations, the results of the study clarify whether the current conditions and
developments within the listed and the unlisted U.S. technology market relate to those
conditions and developments that were present during the Dot-com bubble in the late 1990s.

3.7 ETHICAL CONSIDERATIONS

Research ethics refers to the moral principles which guide the researcher in conducting
research in a responsible and morally defensible way. Normative ethics includes the
deontological perspective which states that the end can never justify the means in research
(Gray, 2019). For the purposes of this study the deontological view was employed, chiefly
because this study was conducted in such a way that ethical principles were never
compromised.

The following factors were considered as vital considerations relating to the ethical principles
of this study:

• The gathering of adequate secondary data which is relevant and not excessive in order to
serve the purpose for which it was intended.
• The secondary data gathered was accurate, up to date and from reliable sources.
• Analysis of the secondary data was conducted in an ethical manner without the need of
requiring achieving a predetermined end.
• In terms of references used within this study, sources are referenced correctly in order to
avoid plagiarising any work performed by others and obtaining the required permissions
from sources if required.

3.8 SUMMARY

The purpose of this chapter was to establish and present the research strategy, design and
methodology in order to answer the research questions introduced in Chapter 1. In terms of
the research strategy, it was decided to follow a quantitative methodology based on the
positivist research approach and secondary data will be employed in this study based on its
advantages. The data specifications relating to technical and fundamental analysis of the U.S.
indices and IPO data of U.S. based companies were included within the research design
section, followed by the inclusion of an analysis of the finalised datasets.

The empirical models to be employed in the analysis the U.S. indices and the IPO datasets
were outlined within the methodology section of this chapter. This included the motivation of
the chosen indices and the ratios selected, as part of the fundamental analysis. This is

68
followed by a discussion on the validity of the data analysis tools and the reliability of the data
sources. The chapter is concluded with a presentation on a number of limitations inherent to
this study and the ethical principles considered.

In the following chapter, the methodologies discussed within this chapter relating to the
technical and fundamental analysis of different indices and the underpricing of U.S. based
companies performing an IPO will be applied, and the results of this analysis will be discussed
in detail.

69
CHAPTER 4: RESEARCH RESULTS

4.1 INTRODUCTION

The various research objectives of this study as set out within the first chapter, are to
determine collectively whether the current conditions and market dynamics contribute to the
existence of a possible new bubble within the U.S. technology market. This chapter presents
the results of the analyses by implementing the research methodologies, as described in the
previous chapter. This chapter has therefore been arranged in the following manner: Initially
the technical and fundamental analysis of the U.S. market indices is presented in the first two
sections. This will be followed by the investigation of the levels of IPO underpricing and the
testing of the hypotheses formulated within the previous chapter. Finally, an analysis relating
to the overall U.S. technology market will be presented.

In terms of the technical analysis, this will be utilised in order to identify and evaluate trends
and patterns and will be applied to the selected U.S. technology indices, benchmarked against
the two overall U.S. market indices. This analysis will be employed between 1996 to 2001,
which is considered to be the timeframe related to the historical Dot-com bubble and 2014 to
2019, which is the most recent time series data and spans a similar six-year period.
Additionally, the 12-month trailing earnings per share (EPS) of the above indices will also be
compared for the same related periods. The fundamental analysis which will be used in order
to identify trends and patterns in the fundamental values of the indices is similar to the
technical analysis above. The valuation ratios relating to the technology indices will be
benchmarked against the two overall U.S. market indices.

The investigation of the IPO underpricing levels for the period 2014 to 2019 will be investigated
through the use of statistical methods such as the student’s t-test and regression analysis.
The levels of IPO underpricing will be analysed in relation to the levels of IPO underpricing
noted during the Dot-com bubble period, in order to test the hypotheses formulated within
Chapter 3. In terms of the analysis of the overall U.S. technology market, a total of four market
conditions will be evaluated as potential contributors to the formation of a new speculative
bubble, as follows: Firstly, an evaluation of the U.S. federal interest rate, followed by an
analysis of the latest U.S. stock market confidence indices. The last two conditions relate to
an analysis relating to the level of venture capital funding and the presence of unicorn
companies.

70
4.2 TECHNICAL ANALYSIS

In order to identify and evaluate trends and patterns in the price developments of the chosen
U.S. technology indices benchmarked against the two overall U.S. market indices, we utilise
technical analysis. This analysis methodology will be employed in order to identify similar price
movements within the Dot-com period, 1996 to 2001 compared to a similar six-year timeframe
period relating to 2014 to 2019.

The various technology indices and the two overall U.S. market indices price developments
for the Dot-com period and the latest period have been graphically illustrated collectively and
individually, in the figures below. In terms of the NASDAQ-100 Technology Sector Index, as
this index was only introduced during February 2006, weekly and monthly data was only
obtained for the later period stated above. The technology indices and two overall U.S. market
indices weekly price data was rebased at the start of 1996 and 2014 to an absolute value of
100, in order to evaluate the price developments from the beginning of each period thus,
further enhancing comparability.

Figure 12: Weekly closing price of U.S. Indices from 1996 to 2001.

Source: Bloomberg

71
The figure above provides a visual indication on the price movements of the various indices’
values with respect to the different timeframes within the Dot-com bubble period. During the
period 1996 to 1997, it can be noted that all of the technology orientated, and the overall
market indices had similar price developments, this changed however during 1998 and 1999.
Technology orientated indices show dramatic increases, due to the increased market
optimism and investor speculation and deviate to a great extent from the overall market
indices. During these increases by the technology indices, the overall market indices’ price
development, by contrast, remained stable. During the first quarter of 2000, the Dot-com
bubble reached its peak and its growth climaxed. With the loss in investor confidence and the
raising of the interest rates by the FED during 1999, the bubble burst and technology share
prices fell as a result of panicked investors. The bursting of the bubble stabilised during 2001
where the technology indices started to recover from the sharp decline in 2000.

Figure 13: Weekly closing price of U.S. Indices from 2014 to 2019.

Source: Bloomberg

From 2014 to the middle of 2016, both the technology and overall market indices had similar
price developments with no deviations or volatility noted. Similar to the Dot-com bubble, by
the end of 2016 to the third quarter of 2018, there was an overall increase in prices, but with
technology indices experiencing significantly higher rates of increases, as evident from the
deviation from the overall market indices in the figure above.

72
At the end of 2018, a significant decrease in technology indices and a less prominent decrease
in overall market indices can be seen. This was the result of a loss of investor confidence in
large technology companies and interest rate increases during 2018. Major public technology
companies such as Facebook, Apple, Amazon, Netflix and Google, which made up more than
10% of the S&P 500 during that time, came under scrutiny from regulators relating to data
privacy. On December 19, 2008, the U.S. Federal Reserve also announced that the interest
rate would increase from 2.25% to 2.5% in order to increase borrowing costs and avert
bubbles. This was the fourth time interest rates were raised in 2018 (Frazee, 2018).

Throughout 2019, significant price increases and deviations from the overall market can be
noted from the technology orientated indices, in particular the NASDAQ Computer Index (IXK),
S&P 500 Information Technology Sector (S5INFT) and NASDAQ-100 Technology Sector
(NDXT), whilst the overall U.S. market displayed a constant moderate growth rate. It is worth
noting that the increase as noted in the latest time series is comparable with the end of 1998
relating to the Dot-com bubble time series. Thus, the largest and most notable increases
during the Dot-com bubble occurred during 1999 to the first quarter of 2000.

Price versus earnings

Earnings is an important metric in the determination of the valuation of a company and its
profitability and will therefore be incorporated within the share market price of companies. The
influence of this metric which will thus be reflected in companies’ share prices which constitute
the various indices. The development of the monthly trailing 12-month earnings per share
(EPS) in relation to the price developments for each index will be investigated for both the Dot-
com series and latest time series.

73
Figure 14: NASDAQ Composite Index (CCMP) index price versus earnings from 1996 to
2001.

Source: Bloomberg

The index price for the NASDAQ Composite increased significantly from 1999 to the first
quarter of 2000, reaching its peak during the first quarter of 2000, then subsequently declined
at a rapid rate until the end of 2001. This is consistent with the Dot-com bubble pattern. In
terms of the index’s related earnings in the same period, from the beginning of 1998, earnings
steadily decreased and from the beginning of 2001 the earnings became negative.

As this is trailing 12-month EPS, the decline of this metric to zero during 2000 indicates that
there were minimal earnings present during 1999, which is the period associated with the
largest increases in index prices. During 2001, the EPS metric associated with the index
became negative, which indicates that there were negative earnings present during 2000,
which is consistent with empirical literature on the bursting of the Dot-com bubble.

74
Figure 15: NASDAQ Composite Index (CCMP) index price versus earnings from 2014 to
2019.

Source: Bloomberg

From the figure above it can be noted that with both the index price and the index’s trailing 12-
month EPS indicate modest increases throughout the time period. It can also be seen that
both these elements move in relative conjunction with each other, indicating that for each price
increase there is also a relating increase in earnings associated with the index.

Figure 16: NASDAQ Computer Index (IXK) index price versus earnings from 1996 to
2001.

Source: Bloomberg

75
In terms of the NASDAQ Computer Index’s price and trailing 12-month EPS development
during the Dot-com bubble period, it can be seen that this is similar to the developments of
the NASDAQ Composite Index during the same period, as shown in Figure 14.

Figure 17: NASDAQ Computer Index (IXK) index price versus earnings from 2014 to
2019.

Source: Bloomberg

In terms of the NASDAQ Computer index’s price and trailing 12-month EPS development
during the 2014 to 2019 period, it can be seen that this is similar to the developments of the
NASDAQ Composite Index during the same period, with the exception that by the end of 2019
there is a deviation between the index price and the relating EPS level. This deviation is similar
to that noted during 1998, which was the start of the Dot-com bubble, as shown in Figure 16.

Note: EPS was not available for NYSE Arca Tech 100 Index (PSE) during the Dot-com bubble
period.

76
Figure 18: NYSE Arca Tech 100 Index (PSE) index price versus earnings from 2014 to
2019.

Source: Bloomberg

In terms of the NYSE Arca Tech 100 Index’s price and trailing 12-month EPS development
during the 2014 to 2019 period, it can be seen that this is similar to the developments of the
NASDAQ Composite Index and the NASDAQ Computer Index, during the same period.

Figure 19: S&P500 Information Technology Sector (S5INFT) index price versus
earnings from 1996 to 2001.

Source: Bloomberg

77
In terms of the S&P 500 Information Technology Sector Index’s price development during the
Dot-com period, it can be seen that this is similar to the developments of the NASDAQ
Composite Index and the NASDAQ Computer Index during the same period. However, the
trailing 12-month EPS development during that period, did not result in any negative earnings
as noted with the previous two indices, but remained at a constant level during the bubble,
only to decrease during 2001. The EPS, however, did not increase relative to the intensive
price increases of the index; indicating that there was a disparity between the price and the
underlying earnings during the Dot-com period for this index.

Figure 20: S&P500 Information Technology Sector (S5INFT) index price versus
earnings from 2014 to 2019.

Source: Bloomberg

In terms of the S&P500 Information Technology Sector Index’s price and trailing 12-month
EPS development during the 2014 to 2019 period, it can be seen that this is mostly similar to
the developments of the NASDAQ Composite Index and the NYSE Arca Tech 100 Index
during the same period. From 2019 however, there was a deviation between the price and the
underlying earnings which started in the beginning of 2019 and by the end of 2019, this
deviation was similar to the deviation noted during the last quarter of 1998, as shown in Figure
19.

78
Figure 21: NASDAQ-100 Technology Sector (NDXT) index price versus earnings from
2014 to 2019.

Source: Bloomberg

In terms of the index’s price and trailing 12-month EPS development during the 2014 to 2019
period, it can be noted that this is similar to the developments of the NASDAQ Composite
Index, NYSE Arca Tech 100 Index and the S&P500 Information Technology Sector Index
during the same period. Towards the end of 2019, there is also a deviation from the price and
the underlying earnings noted as with the S&P500 Information Technology Sector Index.

Figure 22: S&P 500 Index (SPX) index price versus earnings from 1996 to 2001.

Source: Bloomberg

79
In terms of the first U.S. overall market index, it can be seen from Figure 22 that during the
Dot-com period, there was a modest increase and decrease in index price, but this was far
less intensive than that of the technology orientated indices shown above. In conjunction with
the modest price increase and decrease, there was also a more modest increase and
decrease in EPS. This is contradictory to the trend noted with the technology indices shown
above.

Figure 23: S&P 500 Index (SPX) index price versus earnings from 2014 to 2019.

Source: Bloomberg

It can be seen that the S&P 500 Index’s price and trailing 12-month EPS development during
the 2014 to 2019 period, is similar to the developments of the technology indices during the
same period. There are only slight deviations between price and earnings noted during 2017
and 2018 and at the end of 2019.

80
Figure 24: Dow Jones Industrial Average (INDU) index price versus earnings from 1996
to 2001.

Source: Bloomberg

In terms of the second U.S. overall market index, it can be seen from the above figure that the
price increase is nearly identical to that of the S&P500 (SPX) Index during the Dot-com period.
The difference relates to the development of the EPS metric, which modestly decreased during
this period and had slightly recovered by the beginning of 2001. The price and EPS pattern of
this index was similar to that of the technology indices, but far less in terms of intensity.

Figure 25: Dow Jones Industrial Average (INDU) index price versus earnings from 2014
to 2019.

Source: Bloomberg

81
From the figure above it can be noted that the Dow Jones Industrial Average Index’s price and
trailing 12-month EPS development during the 2014 to 2019 period, is similar to the
developments of the technology indices and the S&P 500 (SPX) during the same period. There
are only slight deviations between price and earnings noted during 2017 and 2018 and at the
end of 2019.

Table 5: Highest index price with corresponding EPS within the previous Dot-com
bubble period and within the defined period.

Dot-com bubble 2014 to 2019

period period

Index Price EPS Price EPS

NASDAQ Composite Index (CCMP) 5 048 26 9 007 268

NASDAQ Computer Index (IXK) 2 965 24 5 898 208

NYSE Arca Tech 100 Index (PSE) 1 246 - 3 766 137

S&P500 Information Technology Sector (S5INFT) 981 13 1615 62

NASDAQ-100 Technology Sector (NDXT) - - 5 480 179

S&P 500 Index (SPX) 1 527 52 3 240 152

Dow Jones Industrial Average (INDU) 11 723 457 28 645 1 417

Source: Bloomberg

The table above illustrates the all-time high index price with their corresponding earnings for
both the Dot-com bubble period and the 2014 to 2019 period. In terms of the NASDAQ
Composite Index, although the index during the latest period is nearly twice the level of that
noted during the Dot-com bubble period, the EPS metric has increased by more than tenfold.

This is a similar situation to that of the NASDAQ Computer Index, indicating that the price
increases noted are supported by sounder underlying earnings. In the case of the S&P 500
Information Technology Sector Index, the latest index price high is 1.64 times that of the Dot-
com bubble period, but the corresponding EPS metric is nearly 4.8 times that of the Dot-com
bubble metric.

82
As for the two overall U.S. market indices, the index price during the latest period for the S&P
500 is twice that noted during the Dot-com bubble and the EPS metric nearly tripled in the
same comparison. This is similar to the Dow Jones Industrial Average, indicating that there
was a significant improvement in underlying earnings, supporting the price increases for
technology indices and a moderate improvement for the overall U.S. market indices.

4.3 FUNDAMENTAL ANALYSIS

In order to evaluate and identify trends and patterns in the underlying value of the various
companies who constitute the chosen indices, we employ the use of fundamental analysis.
This methodology will be utilised in order to identify similar movements in fundamental values
within the Dot-com period 1996 to 2001, compared to a similar six-year timeframe period
relating to 2014 to 2019. The chosen technology orientated indices will be benchmarked
against the two overall U.S. market indices.

4.3.1 Price-to-earnings ratio (P/E)

The price-to-earnings (P/E) ratio is a widely used metric in the determination of whether shares
are overvalued or undervalued, by evaluating the market value of shares compared to
companies’ underlying earnings. Technology companies generally have higher P/E ratios due
to investors willing to pay a premium for future earnings growth expectations. The
development of the P/E ratios for the technology indices, compared to the overall market
indices will be investigated for both the Dot-com bubble series and the latest time series.

83
Figure 26: Price-to-earnings ratios of all indices from 1996 to 2001.

Source: Bloomberg

During the period 1996 to 1997 of the Dot-com bubble, it can be seen that all of the indices
had similar P/E metric developments. However, this changed during the middle of 1998 and
was more noticeable during the first quarter of 1999. Technology orientated indices’ P/E ratios
showed dramatic increases and deviated dramatically from the overall market indices. This is
due to the increased market optimism and investor speculation; raising share prices without
any underlying earnings to support the increases.

During 2000, when the Dot-com bubble prices reached their peak, the P/E ratios relating to
the technology indices reached tremendously high values. Subsequently, with the bursting of
the Dot-com bubble and the resulting fall in technology share prices, the technology indices’
P/E values fell drastically until the beginning of 2001. Both the NASDAQ Composite Index and
NASDAQ Computer Index P/E ratios fell to zero due to negative earnings. The S&P 500
Information Technology Sector Index P/E ratio increased by the end of 2001 again, through a
combination of a recovery in index prices and more stable positive earnings at the end of 2001.
In contrast to the technology orientated indices, the overall market indices’ P/E ratio, remained
stable throughout the period.

84
Figure 27: Price-to-earnings ratios of all indices from 2014 to 2019.

Source: Bloomberg

The figure above provides a visual indication on the P/E metric movements of the various
indices with respect to the different timeframes, within the latest time series. Throughout the
2014 to 2019 period, it can be seen that all of the technology and overall market indices except
for the NASDAQ Composite Index, had similar P/E ratio developments with no significant
deviations of volatility noted. As for the NASDAQ Composite Index, its P/E ratio is higher than
the overall market indices and some of the other technology indices. This was also noted in
the Dot-com bubble time series in Figure 26 above. This is due to the fact that this is the most
technology centric index and that technology P/E values are generally higher.

As mentioned in the technical analysis section, by the end of 2018, there was a significant
decrease in technology indices’ prices as a result of a loss in investor confidence and interest
rate increases. This pattern is also evident in the figure above, where a decrease in P/E ratios
can be noted due to a resulting decrease in technology prices. By the end of 2019 it can be
seen that there was a moderate deviation in technology indices’ P/E values from the overall
market indices’ P/E values.

Note: Individual technology indices P/E ratio graphs benchmarked against the S&P 500 (SPX)
and Down Jones Industrial Average (INDU), refer to Appendix 4

85
Table 6: Highest Index price-to-earnings ratio within the previous Dot-com bubble
period and within the defined period.

Dot-com bubble 2014 to 2019

period period

Index P/E Ratio P/E Ratio

NASDAQ Composite Index (CCMP) 202.00 43.31

NASDAQ Computer Index (IXK) 144.92 28.26

NYSE Arca Tech 100 Index (PSE) - 27.28

S&P500 Information Technology Sector (S5INFT) 73.07 25.93

NASDAQ-100 Technology Sector (NDXT) - 30.54

S&P 500 Index (SPX) 29.83 22.88

Dow Jones Industrial Average (INDU) 27.12 21.13

Source: Bloomberg

The table above illustrates the all-time high P/E ratios for both the technology orientated
indices and the U.S. overall market indices during the Dot-com bubble period and the 2014 to
2019 period. In terms of the NASDAQ Composite Index, during the Dot-com bubble period its
P/E ratio record of 202 was 6.8 and 7.4 times that of the S&P 500 Index (SPX) and Dow Jones
Industrial Average (INDU), respectively.

By contrast, during the latest time series the P/E ratio is 1.9 and 2.1 times that of the SPX and
INDU indices respectively. Similarly, the NASDAQ Computer Index P/E ratio record of 144.92
was 4.86 and 5.3 times that of the SPX and INDU indices, respectively. This has decreased
significantly to 1.2 and 1.3 times that of the SPX and INDU indices, respectively. For the
remaining technology indices, the trend is similar, indicating that the P/E ratios are supported
by sound earnings. In terms of the two overall U.S. market indices, these P/E ratios have
slightly decreased from the Dot-com period to the latest time series period.

86
4.3.2 Price-to-sales ratio (P/S)

The price-to-sales (P/S) ratio is a valuation metric that is utilised in order to compare a
company’s share price to its underlying revenues. This ratio indicates the level of investment
by the market for every unit of sales. This metric is important as it was noted in academic
literature, that during the Dot-com bubble companies did not have substantial enough
revenues and sales to sustain their high share prices. The development of the P/S ratio for
the technology indices, compared to the overall market indices will be investigated for both
the Dot-com bubble series and the latest time series.

Figure 28: Price-to-sales ratios of all indices from 1996 to 2001.

Source: Bloomberg

Similar to the P/E ratios during the Dot-com bubble, it can be seen that all of the indices display
similar P/S metric developments. However, this changed during the middle of 1998 and even
more noticeable during the first quarter of 1999. The P/S ratios of both the NASDAQ Computer
and S&P500 Information Technology Sector increased and deviated dramatically from the
overall market indices.

The substantial increases in share prices noted in the previous sections resulted in intensive
increases in the P/S metric, as they were not substantiated by any underlying sales. During

87
2000, when the Dot-com bubble prices reached their peak, the P/S ratios relating to the
technology indices reached tremendously high values. Subsequently, with the bursting of the
Dot-com bubble and the resulting fall in technology share prices, the technology indices’ P/S
values fell drastically until the beginning of 2001. As the bursting of the bubble stabilised during
2001, after share prices returned to their fundamental values, the technology indices P/S ratios
started to recover. In contrast to the technology orientated indices, the overall market indices’
P/S ratios, remained stable throughout the period.

Figure 29: Price-to-sales ratios of all indices from 2014 to 2019.

Source: Bloomberg

The figure above indicates the price-to-sales (P/S) metric movements of the various indices
during the latest time series. Throughout the 2014 to 2019 period, it can be seen that the P/S
metric for the technology indices were elevated above the metrics relating to the overall U.S.
market. From 2014 until the first half of 2018, the P/S ratios relating to the technology indices
continued to deviate further from the overall U.S. market P/S ratios. As noted with the price-
to-earnings (P/E) metric movements during the similar period; by the end of 2018, there was
a significant decrease in technology indices’ prices as a result of investor confidence and
interest rate increases. This pattern is also evident in the figure above, where a decrease in
P/S ratios relating to the NASDAQ Computer Index can be noted, due to a resulting decrease

88
in technology prices. However, by the beginning of 2019, it can be seen that the deviation in
technology indices’ P/S values from the overall market indices’ P/S values recovered and
increased further throughout 2019. The deviation by the end of 2019 was similar to that of the
deviation noted during the middle of 1999, as shown in Figure 28.

Note: Individual technology indices P/S ratio graphs benchmarked against the S&P 500 (SPX)
and Down Jones Industrial Average (INDU), refer to Appendix 5

Table 7: Highest Index price-to-sales ratio within the previous Dot-com bubble period
and within the defined period.

Dot-com bubble 2014 to 2019

period period

Index P/S Ratio P/S Ratio

NASDAQ Composite Index (CCMP) - 3.15

NASDAQ Computer Index (IXK) 12.28 5.31

NYSE Arca Tech 100 Index (PSE) - 3.94

S&P500 Information Technology Sector (S5INFT) 7.29 5.03

NASDAQ-100 Technology Sector (NDXT) - 4.76

S&P 500 Index (SPX) 2.27 2.33

Dow Jones Industrial Average (INDU) 1.99 2.33

Source: Bloomberg

The table above illustrates the all-time highs in P/S ratios for both the technology orientated
indices and the U.S. overall market indices during the Dot-com bubble period and the 2014 to
2019 period. Similarly, to the P/E ratios in the previous section, the NASDAQ Composite Index
during the Dot-com bubble period had a ratio high that was 5.4 and 6.2 times that of the S&P
500 Index (SPX) and Dow Jones Industrial Average (INDU), respectively and in contrast this
was 2.3 times that for both overall market indices in the latest time series.

This is interchangeable for the S&P500 Information Technology Sector where, during the Dot-
com bubble period, this was 3.2 and 3.7 times the SPX and INDU indices, respectively which
as shown by the latest time series decreased to 2.2. The remaining technology indices’ P/S

89
ratios are not significantly elevated above that of the overall market indices, indicating that in
the latest time series period that the share prices are supported by sound levels of revenues.
In terms of the two overall U.S. market indices, these P/S ratios have slightly increased from
the Dot-com period to the latest time series period.

4.3.3 Price-to-book ratio (P/B)

The price-to-book (P/B) ratio is another valuation metric used to compare the market value of
a company’s shares, in relation to its book value. This ratio reflects the value that investors
place on a company’s equity, relative to its nett assets. This metric is important as it was shown
throughout academic literature that significant increases in the ratio were noted during the
Dot-com bubble and that a high price-to-book ratio can indicate the existence of share market
bubbles. The development of the P/B ratio for the technology indices, compared to the overall
market indices will be investigated for both the Dot-com bubble series and the latest time
series.

Figure 30: Price-to-book ratios of all indices from 1996 to 2001.

Source: Bloomberg

90
Similar to the P/E and P/S ratios during the Dot-com bubble, it can be noted that all of the
indices display similar P/B metric developments, however, the NASDAQ Computer Index is
slightly lower than the overall market indices. During the beginning of 1999, both the NASDAQ
Computer and S&P 500 Information Technology Sector P/B ratios increased and deviated
dramatically from the overall market indices. The P/B ratios relating to the technology indices
reached tremendously high values in relation to the peak in the Dot-com bubble prices. With
the bursting of the Dot-com bubble and the resulting fall in technology share prices, the
technology indices P/B fell drastically until the beginning of 2001. This was a result of high
share prices which were unsubstantiated by sound underlying nett assets. As the bursting of
the bubble stabilised during 2001, after share prices returned to their fundamental values, the
technology indices P/B ratios started to recover. In contrast to the technology orientated
indices, the overall market indices’ P/B ratios, remained stable throughout the period.

Figure 31: Price-to-book ratios of all indices from 2014 to 2019.

Source: Bloomberg

Similarly, to the figures relating to P/E and P/S metric movements throughout the 2014 to 2019
period, it is clear that the P/B metric for the technology indices were elevated above the metrics
relating to the overall U.S. market. From the middle of 2017, the P/B ratios relating to the
technology indices continued to deviate further from the overall U.S. market P/B ratios.

91
As noted previously with the P/E and P/S metric movements during the similar period; by the
end of 2018, there was a significant decrease in technology indices prices as a result of
investor confidence and interest rate increases. This pattern is also evident in the figure above,
where a decrease in P/B ratios relating to technology orientated indices can be noted due to
a related decrease in technology prices. However, by the beginning of 2019 it can be seen
that the deviation in technology indices’ P/B values from the overall market indices’ P/B values
recovered and increased further throughout 2019. The deviation by the end of 2019 is similar
to that of the deviation noted during the middle of 1999, shown in Figure 30.

Note: Individual technology indices P/B ratio graphs benchmarked against the S&P 500 (SPX)
and Down Jones Industrial Average (INDU), refer to Appendix 6

Table 8: Highest Index price-to-book ratio within the previous Dot-com bubble period
and within the defined period.

Dot-com bubble 2014 to 2019

period period

Index P/B Ratio P/B Ratio

NASDAQ Composite Index (CCMP) - 5.20

NASDAQ Computer Index (IXK) 12.95 6.89

NYSE Arca Tech 100 Index (PSE) - 5.84

S&P500 Information Technology Sector (S5INFT) 12.30 7.65

NASDAQ-100 Technology Sector (NDXT) - 6.18

S&P 500 Index (SPX) 4.98 3.55

Dow Jones Industrial Average (INDU) 5.25 4.25

Source: Bloomberg

Similar to the P/E and P/S ratios, the table above illustrates the all-time highs for the P/B ratios
for both the technology indices and the U.S. overall market indices during the two periods.
Similarly, to the previous ratios, the NASDAQ Composite Index during the Dot-com bubble
period had a P/B ratio that was 2.5 times that of the average between the U.S. markets indices
and this decreased to 1.8 times in the latest time series. This was the same for the S&P 500
Information Technology Sector, where during the Dot-com bubble period this was 2.4 times

92
that of the average between the U.S. markets indices and then decreased to 1.9 times in the
latest time series. The remaining technology indices’ P/B ratios were not significantly elevated
above that of the overall market indices, indicating that in the latest time series period that the
share prices were supported by sound net assets. In terms of the two overall U.S. market
indices, these P/B ratios slightly decreased from the Dot-com period to the latest time series.

4.4 IPO UNDERPRICING

The following sections will further elaborate on the testing relating to underpricing experienced
by U.S. based technology companies performing an IPO. From the research objective set,
hypotheses will be formulated in order to test the level of underpricing during the 2014 to 2019
period, in relation the level of underpricing noted during the Dot-com bubble period.

4.4.1 Formulation of hypotheses: IPO underpricing

Based on the research objective relating to IPO underpricing, as introduced within Section
3.2.2, the following hypotheses can be formulated:

As previously mentioned, the studies performed by Ljungqvist and Wilhelm (2003), Loughran
and Ritter (2004) and Pinheiro et al. (2016) indicated that during the periods before the Dot-
com bubble 1990 to 1995, underpricing was in line with U.S. historical averages of around
12%. This dramatically increased between the period 1996 to 1998; and during the peak of
the Dot-com bubble 1999 to 2000, the levels of underpricing peaked at around 65%. These
levels reverted back to historical averages following the bursting of the bubble during 2001 to
2003. This dramatic increase in the level of underpricing led to the formulation of Hypothesis
1 below:

Hypothesis 1: As noted in the Dot-com bubble, U.S. based IPOs are currently experiencing
an increased level of underpricing.

Furthermore, the study by Ljungqvist and Wilhelm (2003) indicated that technology and
internet related IPOs experienced an average level of 88% of underpricing during 1999 and
2000. Research by Loughran and Ritter (2004) also indicated that during the period 1990 to
1998, which included the initial two years of the Dot-com bubble, underpricing levels for
technology and internet related companies versus non-technology companies reached 22.2%
and 11.3%, respectively. During the peak of the Dot-com bubble period 1999 to 2000, average
underpricing levels for technology and internet related companies reached 80.6% and 23.1%
for non-technology companies, which led to the formulation of Hypothesis 2 below.

93
Hypothesis 2: U.S. based IPOs which are classified as technology companies are currently
experiencing a higher level of underpricing compared to non-technology IPOs as noted during
the Dot-com bubble.

Historical literature such as Loughran and Ritter (2004) and Michel (2014) found that venture
capital backed IPOs experienced a higher level of underpricing. The study by Loughran and
Ritter (2004) found that during the peak of the Dot-com bubble 1999 to 2000, venture backed
IPOs experienced 82.2% underpricing versus 38.5% for non-venture backed IPOs. Thus,
Hypothesis 3 was formulated below.

Hypothesis 3: Venture capital backed U.S. based technology IPOs experience a higher level
of underpricing than non-venture capital backed technology IPOs as noted during the Dot-com
bubble.

Research by Ljungqvist and Wilhelm (2003) also indicated that the average age of companies
performing an IPO decreased from 14 to 18 years during 1996 to 1998, to 10 to 11 years in
1999 to 2000, and that the age of a company performing an IPO was inversely related to the
level of underpricing. Thus, Hypothesis 4 below was formulated.

Hypothesis 4: The age of U.S. based technology companies performing IPOs is negatively
correlated to the level of underpricing, as noted during the Dot-com bubble.

Based on the research performed by Pinheiro et al. (2016) relating to the high level of IPO
underpricing noted during the Dot-com bubble, it was concluded that high levels of
underpricing were noted in IPOs of technology companies and young companies. Thus,
hypotheses 2 and 4 were formulated above.

4.4.2 Underpricing of U.S. based companies performing an IPO.

In order to test the first hypothesis which is (𝐻" : As noted in the Dot-com bubble, U.S. based
IPOs are currently experiencing an increased level of underpricing.), this translates to a
statement that the underpricing level experienced by U.S. based IPOs between the period
2014 to 2019 was higher than the level of underpricing during the period before the Dot-com
bubble 1990 to 1995, at 12.85% (Loughran and Ritter, 2004).

94
Table 9: Summary statistics relating to underpricing of U.S. based IPOs.

Descriptive statistics Total sample

Mean 17.54%

Median 8.07%

Standard deviation 32.49%

Count 677

Minimum -41.08%

Maximum 231.25%

Source: Own deductions

In terms of the t-test statistics, the following null hypothesis and alternative hypothesis is
specified below:

𝐻# = The level of underpricing between the period 2014 to 2019 is identical to the level of
underpricing of 12.85% noted before the Dot-com bubble, during the period 1990 to 1995.

𝐻" = The level of underpricing between the period 2014 to 2019 is greater than the level of
underpricing of 12.85% noted before the Dot-com bubble, during the period 1990 to 1995.

Table 10: T-test statistics relating to underpricing of U.S. based IPOs.

T-test of means Total sample

T-statistic 3.75

T-critical 1.96

Decision (5% confidence level) Reject 𝐻#

Source: Own deductions

Based on the results of the student’s t-test summarised above, the null hypothesis that the
average level of underpricing is identical to the historical average rate of 12.85% can be
rejected i.e., the average level of underpricing during the period 2014 to 2019 is higher.

95
Table 11: Average U.S. based IPO underpricing by year

Year Number of IPOs Average underpricing

2014 170 16.99%

2015 108 20.31%

2016 74 15.78%

2017 97 11.95%

2018 128 16.05%

2019 100 24.10%

Total 677 17.54%

Source: Thomson Reuters Eikon

From Table 11 above it can be seen that the average underpricing level of 17.54%
experienced by U.S. based IPOs for the period 2014 to 2019, is higher than the historical
average underpricing of 12.85% noted during 1990 to 1995, which was the period before the
Dot-com bubble as noted by Loughran and Ritter (2004). The above underpricing level is also
higher than the 12.25% average underpricing noted by Ritter (2020) for the period 2002 to
2013 for U.S. based IPOs.

The level of underpricing of 17.54% noted above is in line with the average underpricing noted
during 1996 of 17%, which is regarded as the first year of the Dot.com bubble; as indicated by
the research performed by Ljungqvist and Wilhelm (2003) and the average underpricing noted
by Loughran and Ritter (2004) during the first three years of the Dot.com bubble 1996 to 1999
of 17.63%.

The above underpricing level of 17.54% however, is not elevated above historical highs as
indicated by studies performed on the peaks of underpricing noted during Dot-com bubble.
Ljungqvist and Wilhelm (2003) showed that during 1999 and 2000, underpricing levels
averaged to 69% and 56%, respectively and Loughran and Ritter (2004), noted an average
underpricing level of 64% between 1999 to 2000.

Based on the above; as the average level of underpricing of 17.54% experienced by U.S.
based IPOs for the period 2014 to 2019, is higher than the historical average underpricing
before the Dot-com bubble and in line with the average underpricing during the first three years
of the Dot-com bubble, the first hypothesis as stated within this study cannot be rejected.

96
4.4.3 Underpricing of U.S. based technology companies performing an IPO.

In order to test the second hypothesis which is (𝐻$ : U.S. based IPOs which are classified as
technology companies are currently experiencing a higher level of underpricing compared to
non-technology IPOs as noted during the Dot-com bubble.), this translates to a statement that
the elevated underpricing level of U.S. technology IPOs versus non-technology IPOs between
the period 2014 to 2019 is similar to the elevated levels of underpricing experienced by
technology IPOs versus non-technology IPOs within the Dot-com bubble period.

Table 12: Summary statistics relating to technology and non-technology underpricing

of U.S. based IPOs.

Descriptive statistics Technology IPOs Non-technology IPOs

Mean 27.00% 13.84%

Median 19.62% 3.85%

Standard deviation 34.13% 31.09%

Count 190 487

Minimum -30.62% -41.08%

Maximum 217.00% 231.25%

Source: Own deductions

In terms of the t-test statistics the following null hypothesis and alternative hypothesis is
specified below:

𝐻# = The level of underpricing experienced by technology and non-technology IPOs between

the period 2014 to 2019 is identical.

𝐻" = The level of underpricing experienced by technology IPOs between the period 2014 to
2019 is greater than the level of underpricing experienced by non-technology IPOs.

97
Table 13: T-test statistics relating to underpricing of technology and non-technology
U.S. based IPOs.

T-test of means Total sample

T-statistic 4.62

T-critical 1.97

Decision (5% confidence level) Reject 𝐻#

Source: Own deductions

Based on the results of the student’s t-test summarised above, the null hypothesis that the
average level of underpricing is the same for technology IPOs and non-technology IPOs can
be rejected. As expected, the mean and median levels of underpricing are all greater for
technology IPOs. The results are summarised in Table 12 above. It is also evident from Table
14 below that, the average underpricing experienced by technology IPOs is higher than the
underpricing levels of non-technology IPOs during the period 2014 to 2019.

Table 14: Average U.S. based technology and non-technology IPO underpricing by year

Year Number of Average Number of non- Average

technology IPOs underpricing technology IPOs underpricing

2014 51 24.36% 119 13.84%

2015 33 23.28% 75 19.01%

2016 21 36.03% 53 7.75%

2017 26 21.63% 71 8.41%

2018 32 30.19% 96 11.33%

2019 27 30.91% 73 21.58%

Total 190 27.00% 487 13.84%

Source: Thomson Reuters Eikon and researcher’s own deductions

From Table 14 above, it can be seen that the average underpricing experienced by U.S. based
technology and non-technology IPOs for the period 2014 to 2019 is 27.00% and 13.84%
respectively. The level of underpricing experienced by non-technology IPOs during this period

98
is higher than the historical average of underpricing experienced by all IPOs before the Dot-
com bubble, which was 12.85%. This also higher than the 11.3% average underpricing levels
of non-technology IPOs during the period 1990 to 1998, which includes the initial two years of
the Dot-com bubble, as noted by Loughran and Ritter (2004).

As stated above, the research performed by Loughran and Ritter (2004) indicated that during
the period 1990 to 1998, underpricing levels for non-technology IPOs averaged 11.3%
however, it was also noted that technology and internet IPOs averaged 22.2% of underpricing
levels. Thus, the 27.00% average underpricing experienced by technology IPOs for the period
2014 to 2019 is also higher than the historical equivalent average of 22.2%.

The levels of underpricing experienced by technology and non-technology IPOs during the
period 2014 to 2019 is below the historical averages reached during the peak of the Dot-com
bubble period 1999 to 2000, of 80.6% for technology IPOs and 23.1% for non-technology
IPOs; as stated by Loughran and Ritter (2004) and the 88% average underpricing experienced
by technology and internet related IPO during the same period, as indicated by Ljungqvist and
Wilhelm (2003).

Based on the above contrasting levels of underpricing experienced by technology and non-
technology U.S. based IPOs during 2014 to 2019 which similar to that noted in the period
before the Dot-com bubble and the beginning of the Dot-com bubble respectively, the second
hypothesis as set-out within this study cannot be rejected.

4.4.4 The impact of different IPO characteristics on underpricing by technology

companies.

In order to test Hypothesis 3 and Hypothesis 4 relating to U.S. based technology companies
performing an IPO, an analysis was performed using an OLS regression model. This model
tests the characteristics of the technology IPOs, which are: the age of the company at its IPO
and whether the IPO was venture capital backed or not. These two independent variables are
added to the regression model summarised in Table 15 below.

99
Table 15: Regression model overview of U.S. based technology IPOs

Variables Technology IPOs

Constant 0.20***
(0.05)

Age -0.001
(0.002)

Venture capital backed 0.13**

(0.05)

Count 190

R-squared 0.04

Adjusted R-squared 0.03

F-statistic 3.55

Probability (F-statistic) 0.03

* Significant at 10%, ** Significant at 5%, *** Significant at 1%
Source: Researcher’s own deductions

From the regression analysis performed above, the adjusted 𝑅$ is 0.03. This indicates the
level of suitability of the data to the model, which means that the technology IPO
characteristics variables added to the model explained a 2,63% variance in underpricing
experienced. The F-statistic of 3.55 which is significant at 5%, indicates that all coefficients
within the regression analysis are significant.

In terms of the third hypothesis which is (𝐻% : Venture capital backed U.S. based technology
IPOs experience a higher level of underpricing than non-venture capital backed technology
IPOs as noted during the Dot-com bubble.), this translates to the fact that the underpricing
level experienced by venture capital backed U.S. based technology IPOs between the period
2014 to 2019 is higher than that of non-venture capital backed technology IPOs, as similarly
noted within the Dot-com bubble period.

In terms of the venture capital backed variable within the regression analysis performed above,
it has a statistically significant (P-value < 0.05) relationship with the level of underpricing at a
5% level of significance. The coefficient of 0.13 noted above, indicates that there is a positive
correlation and direct relationship between the level of underpricing and on whether the
technology company performing an IPO was venture capital backed or not. This statistically
significant relationship supports the above 𝐻% .

100
Table 16: Summary statistics relating to venture capital backed and non-venture capital
backed underpricing of U.S. based technology IPOs.

Descriptive statistics Venture capital backed Non-venture capital

technology IPOs backed technology IPOs

Mean 31.16% 17.55%

Median 29.71% 5.41%

Standard deviation 31.05% 38.95%

Count 132 58

Minimum -30.62% -19.17%

Maximum 148.75% 217.00%

Source: Own deductions

In terms of the t-test statistics, the following null hypothesis and alternative hypothesis is
specified below:

𝐻# = The level of underpricing experienced by technology venture capital backed and

technology non-venture capital backed IPOs between the period 2014 to 2019 is identical.

𝐻" = The level of underpricing experienced by technology venture capital backed IPOs
between the period 2014 to 2019 is greater than the level of underpricing experienced by
technology non-venture capital backed IPOs.

Table 17: T-test statistics relating to underpricing of venture capital backed and non-
venture capital backed U.S. based technology IPOs.

T-test of means Total sample

T-statistic 2.35

T-critical 1.99

Decision (5% confidence level) Reject 𝐻#

Source: Own deductions

101
Based on the results of the student’s t-test summarised above, the null hypothesis that the
average level of underpricing is the same for technology venture capital backed IPOs and non-
venture capital backed technology IPOs can be rejected. As expected, the mean and median
levels of underpricing are all greater for venture capital backed technology IPOs. The results
are summarised in Table 16 above.

From Table 16 above, it can be seen that the average underpricing experienced by venture
capital backed and non-venture capital backed U.S. based IPOs for the period 2014 to 2019
is 31.16% and 17.55%, respectively. The 31.16% level of underpricing is higher than the
historical underpricing average of 22% between the period 1990 to 1998 experienced by
technology and internet IPOs, as noted by Loughran and Ritter (2004). This is also higher than
the 27.00% average underpricing experienced by U.S. based technology IPOs for the period
2014 to 2019.

This level of underpricing experienced by venture capital backed and non-venture capital
backed IPOs for the period 2014 to 2019 is however below the historical average level of
underpricing experienced at the peak of the Dot-com bubble 1999 to 2000. The study by
Loughran and Ritter (2004) noted that venture backed IPOs experienced 82.2% underpricing
while non-venture backed IPOs experienced 38.5% of underpricing.

Based on the statistically significant relationship and the current contrasting levels of
underpricing experienced by venture capital backed and non-venture capital backed IPOs,
which is similar to that noted in the beginning of the Dot-com bubble, the third hypothesis of
this study cannot be rejected.

In terms of the last hypothesis which is (𝐻& : The age of U.S. based technology companies
performing IPOs is negatively correlated to the level of underpricing, as noted during the Dot-
com bubble.), this translates to the fact that there is an inverse relationship between the age
of a technology company preforming an IPO and the underpricing level between the period
2014 to 2019; as noted within the Dot-com bubble period.

From the regression model analysis tabled above it can be stated that the age of a technology
company performing an IPO is negatively correlated with the relating level of underpricing.
Thus, the younger the technology company is at its IPO date, the higher the level of
underpricing it will experience. This negative correlation is however not statistically significant
as the P-value is 0.47. In terms of the above stated hypothesis 𝐻& , this is rejected as there is
negative correlation between the age and level of underpricing experienced by technology
IPOs, but that is not statistically significant.

102
In contradiction with the Dot-com bubble literature Ljungqvist and Wilhelm (2003) and Pinheiro
et al. (2016), this hypothesis will be rejected as the age of an technology company performing
an IPO is not a significant determining factor in the level of underpricing.

4.4.5 Overview of the IPO underpricing hypothesis testing

In terms of the hypotheses formulated within Section 4.4.1 relating to underpricing

experienced by U.S. based companies performing an IPO and the testing performed within
Section 4.4, an overview relating to the conclusions reached is provided below:

Table 18: Summary of IPO underpricing hypothesis testing.

Hypothesis Corresponding literature Testing result Decision

𝐇𝟏 : As noted in the Dot-com bubble,
U.S. based IPOs are currently
experiencing an increased level of
underpricing.
(Ljungqvist and Wilhelm Jr, Positive with similarities 𝐻" : Accepted
2003) to the Dot-com bubble
(Loughran and Ritter,
2004)

𝐇𝟐 : U.S. based IPOs which are
classified as technology companies
are currently experiencing a higher
level of underpricing compared to
non-technology IPOs as noted
during the Dot-com bubble.
(Ljungqvist and Wilhelm Jr, Positive with similarities 𝐻$ : Accepted
2003) to the Dot-com bubble
(Loughran and Ritter,
2004)
(Pinheiro et al., 2016)

𝐇𝟑 : Venture capital backed U.S. (Loughran and Ritter, Positive with similarities 𝐻& : Accepted
based technology IPOs experience 2004) to the Dot-com bubble
a higher level of underpricing than and statistically
(Michel, 2014) significant
non-venture capital backed
technology IPOs as noted during the
Dot-com bubble.

𝐇𝟒 : The age of U.S. based
technology companies performing
IPOs is negatively correlated to the
level of underpricing, as noted
during the Dot-com bubble.
(Ljungqvist and Wilhelm Jr, Negatively correlated 𝐻( : Rejected
2003) but not statistically
significant
(Pinheiro et al., 2016)

Source: Own deductions

103
4.5 U.S. TECHNOLOGY MARKET ANALYSIS

Within the below sections, the overall U.S. technology market will be evaluated with reference
to the speculative bubble identifiers as described within Section 2.9 of the Literature Review.
The first sub-section relates to the effect of the U.S. federal interest rate and its effect on the
development of the potential new technology bubble. This is followed by an analysis of the
latest U.S. stock market confidence indices levels. The last two sub-sections relate to an
evaluation of the levels of venture capital funding, followed by an analysis relating to the
presence of unicorn companies.

4.5.1 Abundance of financing

As mentioned in Chapter 2, relating to the bubble in the 1920s and the Dot-com bubble, the
interest rate policies enacted by the U.S. Federal Reserve Bank (FED) had a direct effect on
the development of the two historical bubbles. In the figure below detailing the development
of the FED interest rates for the period 2014 to 2019 below and with reference to Section 2.9,
it can be stated that on an overall basis, the interest rates are significantly lower than the
interest rates noted during the Dot-com bubble period.

Figure 32: FED interest rate development for the period 2014 to 2019.

FED Interest rate now (Wikipedia)

Source: (Macrotrends, 2020)

104
Between December 2008 and December 2015 the FED interest rate remained at between
0.00% and 0.25%, the lowest rate in the Federal Reserve's history (Macrotrends, 2020). The
overall low interest rates as noted in the figure above, are significantly lower than the interest
rates lows of 3.50% and 4.63%, during the beginning of the 1920s stock market crash and
Dot-com bubble respectively, as cited within Section 2.9.3 of this study. As mentioned
previously, low interest rates enabled by the FED, reduces borrowing costs significantly which
in turn results in high levels of liquidity available in the economy.

During October 2019, the target range for the Federal Funds Rate was between 1.75% and
2.00%. This however was further lowered to a target range of between 0.00% and 0.25%
during March 2020 (Board of Governors of The Federal Reserve System, 2020).
Fundamentally, lowered interest rates also contribute to the fact that the yield on safer
investments such as bonds are also lower; thus, investors will look to riskier investments which
promise higher returns such as the stock market. The increase in investment within the stock
market results in overvaluation and unaccountable growth in share prices (Wall Strategies,
2020). As mentioned earlier, increases in available capital and liquidity is noted by many
scholars as one of the most notable characteristics at the start of a bubble. The historical low
interest rates quoted above translate to a possible indication of an abundance of available
capital within the U.S. economy.

During the peak of Dot-com bubble when the FED interest rate was as high as 6.54% during
July 2000, in order to restore and stimulate the economy, the interest rates were cut to around
1.82% during 2001(Callahan and Garrison, 2003). As the FED rate at the end of December
2019 was 1.55%, this raised concerns as to whether the FED would have enough leverage
through interest rate decreases to stimulate the U.S. economy out of another recession
caused by a speculative bubble.

4.5.2 U.S. stock market confidence indices

As mentioned earlier, as an indication of a possible speculative bubble, the U.S. stock market
valuation confidence index levels decreased significantly during the rise of the Dot-com
bubble. The U.S. stock market confidence indices initiated by Profession Robert Shiller and
produced by Yale University which measure investor confidence and related investors
attitudes can act as an indication of a possible new speculative bubble.

The first index, U.S. valuation confidence index, is a measure of confidence in the current
valuations of share prices compared to true fundamental value or sensible investment value.
The percentage indicated relates to the respondents who think that the market is not too high
i.e., fairly valued (Yale School of Management, 2020b).

105
Figure 33: U.S. valuation confidence index for the period 2014 to September 2020

Source: (Yale School of Management, 2020b)

From Figure 33 above it is evident that investor confidence relating to the valuation of the
stock market fluctuated during the period January 2014 to September 2020. As previously
mentioned, during the rise of the Dot-com bubble period, this index decreased significantly,
indicating that only 30% of investors agreed that the stock market was not overvalued. During
August 2017, the stock market valuation confidence levels decreased to an average of 41%
and decreased again to an average of 43% during March 2018 (Yale School of Management,
2020b). The decrease noted during March 2018 coincided with the decrease within the
technology indices and overall market indices, due to a loss of investor confidence in large
technology companies as shown within the third quarter of 2018 of the technical and
fundamental analysis sections of this study.

During September 2020 the stock market valuation confidence levels decreased to 45.92%
for U.S. institutional investors and 37.87% for U.S. individual investors (Yale School of
Management, 2020b). This translates to the fact that approximately 40% of investors believed
that the market was not overvalued and the remaining 60% believed it was overvalued. The
level of investors believing that the market was overvalued was not as high as the level noted
during the historical Dot-com bubble period, but it is similar to the level noted during March
2018.

The second index, the U.S. crash confidence index, which measures the percentage of
investors who think that probability of stock market crash within the next six months is 10% or
lower. Thus, a lower index value translates to the indication, that there are a large number of
investors who believe that there is a high probability of a stock market crash within the next

106
six months; similar to the conditions preceding the stock market crash that occurred during
1929 (Yale School of Management, 2020b).

Figure 34: U.S. crash confidence index for the period 2014 to September 2020

Source: (Yale School of Management, 2020b)

From Figure 34 above it is evident that investor confidence relating to the probability of a future
crash remained fairly stable during the period January 2014 to July 2019. This however
changed as it increased slightly and subsequently decreased dramatically during the
remainder of the period. The percentage of individual investors who had confidence in the
stock market hit a record low of 13% during August 2020 and the index decreased to an
average of 20% during September 2020, which indicated a higher possibility of a stock market
crash within the upcoming periods (Yale School of Management, 2020b).

4.5.3 Venture capital

As previously mentioned, during the Dot-com bubble period, venture capital investment and
the relating number of deals exponentially increased with the growth of the bubble, in response
to the increased speculation in new technology start-up companies. Subsequently, with the
bursting of the bubble, this exponentially decreased. This pattern can be noted from Figure 35
for the period 1996 to 2019, as shown below:

107
Figure 35: U.S. venture capital investment level and number of deals for the period 1996
to 2019.

Source: (PwC, 2020) and Researcher’s own deductions

Subsequent to the collapse in U.S. venture capital investment due to the bursting of the Dot-
com bubble, the level of investments and deals started to recover in 2014. Massive increases
relating to venture capital deals and amounts can be seen in 2014 where the level started to
deviate from the post Dot-com bubble norm, reaching a peak in 2018. This is a similar
timeframe of increases within a five-year period, to what was seen during the beginning of the
Dot-com bubble where massive increases in both the amount and number of venture capital
deals were noted during the period 1996 to 2000.

During 2000, a record setting amount of venture capital of 118.63 billion U.S. Dollars was
invested. However, this record was broken in 2018 with a historical high of 118.89 billion U.S.
Dollars being invested. The record number of venture capital deals set in 2000 of 8 280 was
unbroken with the second highest number of deals historically of 6 644 reported during 2018.
From 1996 to 2000 there was an increase from 2465 deals to 8280 deals respectively, which
represents a 335.90% increase and during the same period an increase in total venture capital
investment from 10.78 billion U.S. Dollars to 118.63 billion U.S. Dollars representing an
1100.46% increase.

This increase is mirrored by a decrease from 2000 to 2002 of 83.45% in the number of deals
and 86.67% in venture capital invested, respectively. Similarly, from 2014 to 2018, there was
an increase in total venture capital investment from 60.73 billion U.S. Dollars to 118.89 billion
U.S. Dollars, representing an increase of 195.77%, whilst maintaining a high number of deals

108
compared to post Dot-com bubble levels. During 2019, there was only a marginal decrease in
the number of deals and the level of venture capital invested, compared to 2018.

Figure 36: U.S. venture capital investment level and number of deals by quarter for the
period 2014 to 2019.

Source: (PwC, 2020) and Researcher’s own deductions

The number of venture capital deals during the 2014 to 2019 period has remained at a high
level of 1 583 deals per quarter or 6 332 deals per year, on average. It can also be seen from
the figure above that there has been a rapid increase in the level of venture capital investment
with investments rising from 12.40 billion U.S. Dollars in the fourth quarter in 2016 to 40.11
billion U.S. Dollars in the fourth quarter of 2018. The level of venture capital investment
decreased slightly during 2019, but the level remains elevated and comparable to the high
historical levels noted during the Dot-com bubble period.

109
Figure 37: U.S. venture capital investment by sector for the period 2014 to 2019.

Source: (PwC, 2020) and Researcher’s own deductions

From the figure above it can be seen that the U.S. venture capital investment relating to
internet and software which are subsectors of the overall technology sector, constituted 46%
of the total investment during the latest period. This is higher than the 38% of the total
investment noted during the Dot-com bubble period. Venture capital investment within the
technology sector during the 2014 to 2019 period constituted 237 billion U.S. Dollars from a
total of 514 billion U.S. Dollars. There were a total of 37 990 venture capital deals within the
2014 to 2019 period of which 19 942 were to the technology sector. That constituted 52% of
all deals during the period. For both periods, the technology sector has received the highest
margin of U.S. venture capital investment and number of deals as a result of increased focus
on financing start-up companies within the technology sector, associated with high growth and
profitability potential.

110
4.5.4 Unicorns

Historically, private companies relied on IPOs to raise additional capital to grow and expand
operations. The increased levels of U.S. venture capital noted within the previous section,
have enabled these private companies to raise increasing amounts of private funding, allowing
them to reach billion U.S. Dollar valuations without the need to go public.

As of June 30, 2019, there were 187 active U.S. based unicorns. The total aggregated
valuation of these unicorns was 603 billion U.S. Dollars. The average venture capital raised
by private companies during 2019 before achieving unicorn status was 160 million U.S. Dollars
and the average venture capital raised by unicorns were 295 million U.S. Dollars. From the
figure below it can be stated that in 2013, the number of unicorns has exponentially increased,
with an average of 51 new unicorns being added to the list per year from 2014 to 2019.

Figure 38: U.S. based unicorn count and aggregate unicorn valuation for the period
2009 to 2019.

*As of June 30, 2019

Source: (Pitchbook Data, 2019) and Researcher’s own deductions

The figure below illustrates the industry composition of the 187 U.S. based unicorns active
during 2019. Making up 44% of the total unicorns’ population, the highest concentration of
active unicorns were based within the software (technology) industry.

111
Figure 39: Number of active U.S. based unicorns by industry as of June 30, 2019.

Source: (Pitchbook Data, 2019) and Researcher’s own deductions

By contrast with the rise in the number of unicorns during 2014 to 2019, during the same
period, the number of IPOs has decreased significantly. During 2014 there were a total number
of 170 IPOs and this has decreased to 100 during 2019. Similarly for technology IPOs, there
were 51 in 2014 which decreased to 27 during 2019. The increase in the number of unicorns
coupled with the decrease in the number of IPOs, confirms the pattern of high growth start-up
technology companies staying private for longer as a result of high levels of available funding
through the abundance of venture capital. The result as shown in Figure 38 above is that these
start-up companies can raise increasing amounts of venture capital funding through increasing
private valuations, thus delaying the need for an IPO.

According to the PwC/CB Insights MoneyTree Report; as at the end of June 2020, the number
of unicorns has increased to a historical record number of 209 U.S. based unicorns with an
aggregate valuation of 630 billion U.S. Dollars. The most notable and highly valued technology
unicorns are, Stripe, Space X and Airbnb with operations in the emerging areas of financial
technology, space exploration technology and travel on-demand respectively (PwC, 2020).

Stripe is a global technology company that builds online-based economic infrastructure which
is used by companies to accept web and mobile payments. Stripe’s software is also utilised in
a set of new applications such as crowdfunding, payment analytics and fraud prevention by
global companies (Crunchbase, 2020). This internet-based payment service provider which
was founded in 2010 has raised 1.95 billion U.S. Dollars and was valued during 2020 at 36

112
billion U.S. Dollars. As of January 2018 its estimated annual sales of 1.5 billion U.S. Dollars,
translates to a price-to-sales ratio of 24 (CB Insights, 2020). This ratio, which is nearly double
the highest reported ratio during the Dot-com bubble period and is significantly larger than the
overall market average of 2.33, as noted in Section 4.3.2

SpaceX (Space Exploration Technologies Corporation) is a start-up company which designs

advanced rockets and spacecraft and develops guidance and control software (Crunchbase,
2020). This rockets and spacecraft technology orientated unicorn was founded in 2002 and
has raised 5.37 billion U.S. Dollars and was valued during August 2020 at 46 billion U.S.
Dollars. As of September 2014 it had an estimated annual sales of about 333 million U.S.
Dollars, which translates to a price-to-sales ratio of 138.14 (CB Insights, 2020). This ratio
which is excessively higher that the historical Dot-com ratios or the overall market average as
shown in Section 4.3.2

Airbnb is a global community marketplace for people to list, discover and book accommodation
though mobile phones or the internet. Airbnb’s online marketplace is facilitated bookings and
financial transactions of over 4.5 million accommodation listings worldwide during 2020
(Crunchbase, 2020). This internet-based accommodation and travel provider founded in 2008
has raised 6.63 billion U.S. Dollars and was valued during June 2020 at 18 billion U.S. Dollars.
As of December 2017 it had an estimated annual sales of about 2.60 billion U.S. Dollars, which
translates to a price-to-sales ratio of 6.92 (CB Insights, 2020). This ratio is higher than the
technology market average and the overall market average reported in Section 4.3.2.

Previous notable venture capital backed technology unicorns such as Uber and Lyft, that both
develop and support ride-sharing technology applications had their IPOs during 2019. Both
Uber and Lyft provide a peer-to-peer platform which connects nearby passengers and drivers
worldwide for on-demand travel. Uber was the most highly valued technology IPO and with
both unicorns largely operating via mobile apps, they have become disruptors of the travel
industry (Crunchbase, 2020).

Uber was founded in 2009 and had the highest private valuation for a ride-sharing company
which amounted to 75 billion U.S. Dollars prior to its IPO during October 2019. By the end of
September 2020, its valuation, which is based on market capitalisation, decreased by 18% to
62 billion U.S. Dollars due to a steady decrease in its share price. Lyft which was founded in
2012 had its IPO during March 2019, with a previous private valuation set at 24 billion U.S.
Dollars. At IPO, the initial share price was set at 72 U.S. Dollars, which rose to 78.29 U.S.
Dollars by the end of the first trading day. At the end of September 2020, its share price fell to
27.22 U.S. Dollars with a valuation based on its market capitalisation of 8.59 billion U.S.

113
Dollars, translating to a 62% decrease in value. By the end of 2019, both Uber and Lyft had
negative earnings per share of 6.81 and 11.44, respectively (CB Insights, 2020).

4.6 CONCLUSION

In this chapter, the proposed methodologies from the previous chapter were implemented to
obtain the results needed, in order to analyse the possibility of a potential new speculative
bubble within the U.S. technology market. The three methodologies applied within this chapter
related to; a technical and fundamental analysis of U.S. indices, an investigation relating to
IPO underpricing levels and an analysis of the overall U.S. technology market.

In terms of the technical analysis of the U.S. indices, the weekly price data was restated to
100 at the beginning of the Dot-com bubble and 2014 to 2019 periods and graphically
illustrated. Monthly data relating to the U.S. indices’ valuation ratios for the same time periods
were similarly restated in order to perform the proposed fundamental analysis. The graphs
pertaining to the technical and fundamental analysis were used, in order to identify and
evaluate any trends and patterns that were similar to the Dot-com bubble in the latest 2014 to
2019 period.

In terms of the IPO underpricing investigation, statistical methods were utilised in order to
address the hypotheses formulated within Chapter 3. The student’s t-test was utilised in order
to address the first two hypotheses pertaining to the comparability of the current level of IPO
underpricing to technology IPOs that were performed during the Dot-com bubble period.
Furthermore, the regression model was utilised in order to address the last two remaining
hypotheses, which related to how different IPO characteristics affected the level of
underpricing experienced by technology IPOs during the period 2014 to 2019.

The last section within this chapter related to the overall U.S. technology market analysis.
Firstly, the U.S. federal interest rates were evaluated for the period 2014 to 2019 and were
then compared with the levels recorded during the bubble in the 1920s and the Dot-com
bubble. Subsequently, two U.S. stock market confidence indices were evaluated for the period
January 2014 to September 2020, as an indication of a possible speculative bubble.

The venture capital investment level and number of deals performed within the U.S. during
the period 1996 to 2019 were also evaluated. That included an analysis of venture capital
investment by sector, for the period 2014 to 2019. Finally, the number of U.S. based unicorn
companies and their aggregate valuation for the period 2009 to 2019 was evaluated. This also
included an analysis of the number of active U.S. based unicorns by industry, as of June 30,
2019. Three of the most notable and highly valued technology unicorns during 2020 was

114
evaluated, including an evaluation of previous equally notable and highly ranked unicorns who
performed an IPO during 2019. The concluding findings and remarks will be discussed in the
last chapter.

115
CHAPTER 5: DISCUSSIONS, CONCLUSIONS AND
RECOMMENDATIONS

5.1 INTRODUCTION

The purpose of this study was to evaluate whether the current conditions and market dynamics
contribute to the existence of a possible new bubble within the U.S. technology market. As
mentioned by Vogel (2010), speculative bubbles are difficult to identify as they are model
specific and are generally defined from a relatively restrictive framework. They do however
occur, and they all exhibit common behavioural features which can be identified by referring
to prior speculative bubble dynamics.

This chapter outlines the conclusions and recommendations of this study. Section 5.2 presents
a summary of the study, which is followed by a discussion relating to the findings that emerged
from this study. Section 5.4 provides the limitations of the study, followed by recommendations
for further research, based on its findings. Finally, the research problem and research
objectives are highlighted to contextualise the conclusions reached.

5.2 SUMMARY OF THE STUDY

The first chapter set out to introduce the study and explain its significance. This chapter
provided the overall problem statement and the three research objectives which were
formulated from that. Relevant literature was reviewed relating to economic bubbles and the
underlying financial philosophies and descriptions relating to notable historical speculative
bubbles was also provided. The background relating to venture capital, initial public offerings
(IPO) and the functioning of the U.S. stock market was provided. Based on that, a summary
relating to the methods for the identification of speculative bubbles was provided as well as
an examination of existing empirical literature on the possibility of a new bubble.

A quantitative non-experimental research design was implemented within this study. In terms
of the technical and fundamental analysis and the overall U.S. technology market analysis,
this was characterised as descriptive, whilst the IPO underpricing investigation was
characterised as correlational. The research methods implemented were similar to those of
previous studies that examined the possibilities of a new technology bubble. Various
methodologies were implemented to obtain the results needed, in order to analyse the
possibility of a potential new speculative bubble within the U.S. technology market. The three
methodologies applied related to a technical and fundamental analysis of U.S. indices, an

116
investigation relating to IPO underpricing levels and an analysis of the overall U.S. technology
market. An analysis of these findings was evaluated and presented in the section below.

5.3 SUMMARY OF THE FINDINGS

The three research objectives of this study as set out within the first chapter, were to determine
collectively whether the current conditions and market dynamics contribute to the existence of
a possible new bubble within the U.S. technology market. The results obtained in the previous
chapter was therefore arranged under the following sub-sections: A technical and fundamental
analysis of the U.S. market indices, followed by an investigation of the levels of IPO
underpricing and finally, an analysis relating to the overall U.S. technology market.

Technical and fundamental analysis of U.S. indices

Through the technical analysis performed, significant price increases and deviations by the
technology indices from the overall market were noted during 2019. These increases are
comparable with the beginning of the Dot-com bubble period, but not comparable to the
highest increases and deviations noted during the Dot-com bubble period. Incorporating the
12-month trailing earnings per share (EPS) within the analysis, it was found that in the latest
times series, unlike during the Dot-com bubble period, price increases were accompanied by
equal increases in earnings. There was, however, a deviation between price and earnings
which started in the beginning of 2019, which resembled a deviation that was observed during
the beginning of the Dot-com bubble for certain technology indices. Although technology
indices prices have nearly doubled since the Dot-com bubble period, the EPS metric has
improved overall more than tenfold, indicating that price increases were supported by even
sounder underlying earnings.

Through the fundamental analysis performed, it was noted that on average, technology
companies are valued slightly higher, compared to the overall market due to high growth
expectations. During the Dot-com bubble, the P/E ratios of technology indices were up to
seven times higher than that of the overall market indices, while the P/E ratio for technology
indices in the latest time series was slightly higher than the overall market. This indicated that
the latest P/E ratios were supported by sound earnings, compared to the minimal earnings
present during the Dot-com bubble period, resulting in high P/E values. During 2019, the P/S
ratio of the technology indices displayed a deviation similar to that noted during the beginning
of the Dot-com bubble. However, similarly to the P/E ratio, the P/S ratio during the Dot-com
bubble was multiple times that of the overall market, while in the latest time series, this was
only double. Similarly to the P/E and P/S metrics, in the latest time series, the technology

117
indices P/B ratio was slightly elevated above the overall market and a similar deviation was
noted during 2019 from the overall market. The decrease in the P/B metric from the Dot-com
bubble period compared with the latest times series indicated that the price increases were
supported by sound net assets.

IPO underpricing

Historical studies conducted investigating the level of Initial Public Offering (IPO) underpricing
experienced by companies during the Dot-com bubble period, concluded that this was
significantly elevated. The study by Pinheiro et al. (2016) also noted that the combination of
characteristics such as young, venture capital backed, and technology orientated companies
experienced the highest level of underpricing during the Dot-com bubble period. In this study,
the levels of underpricing during the period 2014 to 2019 were investigated in comparison with
the levels noted during the Dot-com bubble period, with consideration given to the above IPO
characteristics.

In order to address the second research objective, the statistical methods investigating the
overall level of IPO underpricing and the underpricing levels of IPOs which were classified as
technology companies, were investigated for the period 2014 to 2019. The results matched
those of the Dot-com bubble studies by Ljungqvist and Wilhelm (2003), Loughran and Ritter
(2004) and Pinheiro et al. (2016); thus confirming the presence of elevated undepricing levels
noted during 2014 to 2019. Overall, IPO and technology orientated IPO levels of underpricing
noted during 2014 to 2019 were higher than the historical averages noted before and after the
Dot-com bubble. The levels of underpricing are in line with the first three years of the Dot-com
bubble but were not elevated to the degree noted during 1999 and 2000, which are considered
to be the peak of the Dot-com bubble.

Using an OLS regression model, the following characteristics of technology IPOs were
evaluated; the age of the company at IPO and whether the IPO was venture capital backed or
not. The regression model confirmed the findings similarly noted during the Dot-com bubble.
A positive significant relationship between the level of underpricing and whether the
technology company performing an IPO was venture capital backed or not was found.

It was also noted that the levels of underpricing experienced by venture capital backed
technology IPOs was higher than the historical averages noted before and after the Dot-com
bubble but were not elevated to the extent noted during 1999 and 2000, which are considered
to be the peak of the Dot-com bubble. It was found that the age of a technology company
performing an IPO however, was not a significant determining factor in the level of

118
underpricing; which contradicts the findings of Dot-com bubble studies by Ljungqvist and
Wilhelm (2003) and Pinheiro et al. (2016).

U.S. technology market analysis

The analysis of the overall U.S. technology market was divided into four sub-sections. The
first sub-section focused on the effects of the U.S. federal interest rate, followed by an analysis
of the latest U.S. stock market confidence indices levels. The third sub-section provided an
evaluation of venture capital funding levels and finally, an analysis was performed relating to
the emergence of unicorn companies. It was noted that interest rates remained at record lows
from 2008 and that the current level of interest rates is lower than the rates reported before
the stock market bubble of the 1920s and the Dot-com bubble. These notably low interest
rates reduces borrowing costs which results in an abundance of available capital within the
U.S. economy, similarly to previous notable speculative bubbles, as stated by Vogel (2010)
and Porras (2016).

With reference to the U.S. stock market confidence indices, the first index, the valuation
confidence index, accurately reflected a loss in investor confidence in large technology
companies during 2018, whereupon a price decrease within the U.S. technology indices
occurred. This index’s low value noted during September 2020 was similar to that noted during
the loss of valuation confidence during 2018. The second index, the crash confidence index,
remained stable during the period 2014 to 2019, but during 2020, the index has decreased to
a record low, indicating a greater possibility of a stock market crash in the near future.

Venture capital funding and investment during the Dot-com bubble increased exponentially in
response to increased speculation in new technology start-up companies. From 2014,
massive increases in the level of venture capital funding and number of deals was noted and
in 2018, the previous funding record set during the Dot-com bubble was exceeded. Similar to
the Dot-com bubble, the technology sector has achieved the highest level of venture capital
investment and number of deals for the period 2014 to 2019.

The increase in levels of U.S. venture capital investment has enabled the emergence of private
start-up companies with valuations exceeding one billion U.S. Dollars, known as unicorns.
These unicorn companies have increased exponentially from 2013 and by the end of June
2020, there was a record number of 209 U.S. based unicorns with an aggregate valuation of
630 billion U.S. Dollars. The highest concentration of active unicorns was based within the
technology market during 2019. An analysis of three notable and highly valued technology
unicorns indicated that their aggregate valuation of 100 billion U.S. Dollars far exceeds the

119
level of funding that was raised, and their estimated price-to-sales ratios were excessively
higher than the ratios noted during the Dot-com bubble period. Two former notable technology
unicorns that performed their IPO during 2019 were also evaluated and it was noted that both
of these companies reported a decrease in their valuations, and both reporting negative
earnings per share by the end of 2019.

5.4 LIMITATIONS

Overall, four limitations to this study were identified, the first is that datasets for both the
technical and fundamental analysis as well as the IPO underpricing investigation, only spans
a duration of six years (2014 to 2019) which accounts for a similar timeframe relating to the
historical Dot-com bubble (1996 to 2001). The second relates to the use of only five U.S.
technology orientated indices which was utilised in the technical and fundamental analysis.
The third relates to the use of only three valuation metrics (P/E, P/S and P/B) within the
fundamental analysis. The final limitation relates to the fact that historical IPO data collected
was limited to only U.S. based IPOs and no other regions was considered. The above
limitations were identified and justified within Chapter 1 and no further limitations pertaining to
this study was identified.

5.5 RECOMMENDATIONS AND FUTURE RESEARCH

In order to continually assess the potential development of a speculative bubble within the
U.S. technology sector, the researcher’s recommendation is that the technical and
fundamental analysis of the U.S. technology indices should be further extended and
continuously evaluated. The scope of technology indices could be widened in order to include
more indices and the scope of valuation ratios related to both the technology and overall
market indices could be broadened.

Future studies could extend the period of testing on IPO underpricing levels and could possibly
include within the dataset, companies classified as biotechnologies based on their Standard
Industrial Classification (SIC) code. It was noted throughout the data analysis for this study,
that these companies also displayed high levels of underpricing.

Further and more extensive research should be performed relating to the prevailing low levels
of interest rates and the possible resultant continuous contribution to the development of a
new speculative bubble. The U.S. market confidence indices evaluation period could be
extended, in order to evaluate the outcome of the crash confidence index reaching a historical
low. The current high levels of venture capital investment and their contribution to the

120
emergence of a large number of highly valued unicorns, which are illiquid investments should
be investigated further. A further study could include post IPO performance of these highly
valued unicorn companies, in order to gain insight on whether these high private valuations
are sustainable within the public market requirements of extensive financial and accounting
disclosures.

As mentioned by Goodnight and Green (2010), with the emergence of globalisation of markets
and banking, it could be plausible to extend this research and not limit it to the U.S. technology
market only. The technical and fundamental analysis could be extended to include global
technology and market indices. The IPO underpricing investigation could include IPOs
performed on international markets and not be limited to only U.S. markets. Finally, the
availability of venture capital and the emergence of unicorn companies could be expanded to
include a global reach. It was noted during the research for this study, that there are some
notable and highly valued unicorn companies emerging within China.

5.6 CONCLUSION

The aim of this study was to identify a possible new speculative bubble developing within the
U.S. technology market and three research objectives were formulated to be addressed within
the study.

The first objective of this study was to determine whether a similar bubble pattern compared
to that of the Dot-com bubble could be identified through the use of a technical and
fundamental analysis of U.S. technology indices, which were benchmarked against overall
U.S. market indices.

The technical and fundamental analysis of U.S. indices was utilised in determining whether a
similar pattern or trend compared to the Dot-com bubble could be identified. The technical
analysis identified price increases and deviations from the overall market that are comparable
with the beginning of the Dot-com bubble during 2019. These increases were however
supported by better earnings than those which were present during the Dot-com bubble. The
fundamental analysis identified similar increases and deviations from the overall U.S. market
during 2019. The increases in valuation metrics were once again better supported by sound
earnings, revenues and net assets.

The price increases and deviations from the overall market were much more evident than
those noted by previous studies by van de Hoef (2011), Christoffersen and Gulbrandsen
(2011) and Lienkamp and Koepsell (2015). This accelerated growth in the technology indices

121
compared to the two overall U.S. market indices, is comparable what was noted during the
beginning of the Dot-com bubble, which does provide evidence that further increases would
further cement the indications of a new bubble forming.

The second objective of this study was to determine whether the current levels of IPO
underpricing are comparable to those noted during the Dot-com bubble period; in order to
establish the existence of a possible new bubble.

The IPO underpricing investigation aimed to establish the existence of a possible bubble
through comparing the current levels of underpricing experienced with those noted during the
Dot-com bubble period. This investigation found that IPO underpricing levels noted during
2014 to 2019 were higher than historical averages and that are in line with the first three years
of the Dot-com bubble. However, these levels of underpricing are not elevated to the extent
noted during the peak of the Dot-com bubble period.

The study also confirmed that certain IPO characteristics experience varying levels of
underpricing, as noted in previous studies by Sousa and Pinho (2014), Van Ooteghem (2016)
and Paping (2017), but more evident was the increased level of underpricing which was noted
during this study compared to the levels quoted by the previous studies. As these levels of
underpricing are comparable to those noted during the first three years of the Dot-com bubble,
this provides a further indication of a bubble forming within the U.S. technology market.

The third and final objective of this study was to investigate whether the current conditions
within the U.S. technology market such as U.S. federal interest rates and levels of venture
capital investment are comparable to the conditions present during the Dot-com bubble period;
in order to establish whether these might contribute to a possible new bubble.

The current low interest rates noted and the target range for interest rates being set at nearly
zero percent by the FED during March 2020, will results in continued increases in levels of
liquidity available in the U.S. economy, which in turn, has been identified as a contributing
factor to sustaining speculative bubbles. During October 2020, the U.S. crash confidence
index has been referenced frequently in an attempt to predict the possibility of a stock market
crash. Professor Shiller cited the crash confidence index and stated that “people fear a stock
market crash more than they have in years” (Yale School of Management, 2020a).

A trend has been observed relating to a decrease noted in the number of IPOs and an increase
in the number of unicorns, which is likely to continue as there is increasing amounts of venture
capital funding becoming available as well as the high level of regulation and cost attributed
with going public. The result of this trend will be that highly valued technology unicorns will

122
stay private for longer, with questionably higher private valuations; especially considering that
their valuation ratios are excessively higher than ratios recorded during the Dot-com bubble
period.

In terms of concluding whether there is a new speculative bubble forming within the public
U.S. technology market is based on the following conclusions: Technology indices are
displaying a trend of increases and deviations during 2019, similar to what occurred during
the beginning of Dot-com bubble. Levels of IPO underpricing are comparable to those noted
during the first three years of the Dot-com bubble. Considering the low level reflected by the
crash confidence index, all these occurrences indicate that the public technology market
during 2019 resembles the beginning of a bubble, but this trend in itself does not constitute a
speculative bubble. The increases noted are supported by sounder revenues, earnings and
net-assets which were at considerably lower levels during the Dot-com bubble period.

In concluding whether there is a new speculative bubble forming within the private U.S.
technology market, is based on the fact that the low levels of interest rates which effectively
increases the levels of venture capital investments, will result in the continuous emergence of
highly valued technology unicorns; with excessive valuation ratios higher than during the Dot-
com period highs. Considering that these unicorns post-IPO performance and valuations have
decreased significantly, indicates that the unicorns are valued above their fundamental values.
Thus, there are strong indications of a potential speculative bubble within the private
technology market.

123
References:
Adams, M., Thornton, B. and Hall, G. (2008) ‘IPO pricing phenomena: Empirical evidence of
behavioral biases’, Journal of Business & Economics Research (JBER), 6(4), pp. 67–74.

Ahlroos, J. (2019) Effect of attention on returns of initial public offerings. Aalto University.

Al Kibaida, O. and Nobanee, H. (2020) ‘Financial Statement Analyses of Apple’, Abu Dhabi
University, (SSRN 3647455), p. 7.

Aliber, R. Z. and Kindleberger, C. P. (2017) Manias, panics, and crashes: a history of

financial crises. Springer.

Allen, F. and Faulhaber, G. R. (1989) ‘Signaling by underpricing in the IPO market’, Journal
of financial Economics, 23(2), pp. 303–323.

Allen, F. and Gale, D. (2000) ‘Bubbles and crises’, The economic journal. Oxford University
Press Oxford, UK, 110(460), pp. 236–255.

Amihud, Y., Hauser, S. and Kirsh, A. (2003) ‘Allocations, adverse selection, and cascades in
IPOs: Evidence from the Tel Aviv Stock Exchange’, Journal of Financial Economics.
Elsevier, 68(1), pp. 137–158.

Anderson, G. and Arsenault, N. (2005) Fundamentals of educational research. Routledge.

Arrington, M. (2010) VCs and super angels: The war for the entrepreneur, TechCrunch by
AOL, Inc. Available at: https://techcrunch.com/2010/08/15/ventur… (Accessed: 17
September 2020).

Asteriou, D. and Hall, S. G. (2015) Applied econometrics. Macmillan International Higher

Education.

Auerbach, R. D. (2008) Deception and Abuse at the Fed: Henry B. Gonzalez Battles Alan
Greenspan’s Bank. University of Texas Press.

Baker, M. and Wurgler, J. (2007) ‘Investor sentiment in the stock market’, Journal of
economic perspectives, 21(2), pp. 129–152.

Barlevy, G. (2015) ‘Bubbles and fools’, Economic Perspectives, 39(2), p. 54.

Barnes, P. (2016) ‘Stock market efficiency, insider dealing and market abuse’, in. Gower, pp.
63–72.

Barnes, S. (2019) Is a Bubble Forming in Tech Stocks?, International Banker. Available at:
https://internationalbanker.com/brokerage/is-a-bubble-forming-in-tech-stocks/ (Accessed: 24
November 2020).

Bartov, E., Mohanram, P. and Seethamraju, C. (2002) ‘Valuation of internet stocks—an IPO
perspective’, Journal of Accounting Research. Wiley Online Library, 40(2), pp. 321–346.

Bisman, J. (2010) ‘Postpositivism and accounting research: A (personal) primer on critical

realism’, Australasian Accounting, Business and Finance Journal, 4(4), pp. 3–25.

Board of Governors of The Federal Reserve System (2020) Federal Reserve issues FOMC
statement. Available at:

124
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm
(Accessed: 7 November 2020).

Bouattour, M. and Martinez, I. (2019) ‘Efficient market hypothesis: an experimental study

with uncertainty and asymmetric information’, Finance Contrôle Stratégie. Association FCS,
(22–4).

Bouwer, L. (2019) ‘Corporate Innovation Generates Shareholder Confidence’, Available at

SSRN 3334543.

Bowen III, D. E., Frésard, L. and Hoberg, G. (2019) ‘Technological disruptiveness and the
evolution of IPOs and sell-outs’, Available at SSRN 3478503.

Brennan, M. J. and Franks, J. (1997) ‘Underpricing, ownership and control in initial public
offerings of equity securities in the UK’, Journal of financial economics. Elsevier, 45(3), pp.
391–413.

Brigham, E. F. and Daves, P. R. (2014) Intermediate financial management. Cengage

Learning.

Broughman, B. J. (2010) ‘Venture Capital: Investment Strategies, Structures, and Policies

(edited by Douglas Cumming)’. Wiley, p. 389.

Brunnermeier, M. K. (2016) ‘Bubbles’, in Banking Crises. Springer, pp. 28–36.

Burton, N. (2018) An Analysis of Burton G. Malkiel’s A Random Walk Down Wall Street.
CRC Press.

Business Information & Industry Classification Experts (2020) What is a SIC Code?
Available at: https://siccode.com/page/what-is-a-sic-code (Accessed: 10 June 2020).

Callahan, G. and Garrison, R. (2003) ‘Does Austrian business cycle theory help explain the
dot-com boom and bust?’, The Quarterly Journal of Austrian Economics. Springer, 6(2), pp.
67–98.

Capital Com (2020) New York Stock Exchange (NYSE). Available at:
https://capital.com/nyse-stock-exchange-definition (Accessed: 6 November 2020).

CB Insights (2020) The Global Unicorn Club, New York: CB Insights. Available at:
https://www.cbinsights.com/research-unicorn-companies (Accessed: 18 July 2020).

Chang, V., Newman, R., Walters, R. J. and Wills, G. B. (2016) ‘Review of economic
bubbles’, International Journal of Information Management. Elsevier, 36(4), pp. 497–506.

Chappelow, J. (2020) How Do Asset Bubbles Cause Recessions? Available at:

https://www.investopedia.com/articles/investing/082515/how-do-asset-bubbles-cause-
recessions.asp (Accessed: 24 October 2020).

Chaudhary, A. K. (2013) ‘Impact of behavioral finance in investment decisions and

strategies–a fresh approach’, International Journal of Management Research and Business
Strategy. Citeseer, 2(2), pp. 85–92.

Chen, J. (2019) Capitalization-Weighted Index, Investopedia. Available at:

https://www.investopedia.com/terms/c/capitalizationweightedindex.asp (Accessed: 7
November 2020).

125
Cheng, H. G. and Phillips, M. R. (2014) ‘Secondary analysis of existing data: opportunities
and implementation’, Shanghai archives of psychiatry. Shanghai Mental Health Center,
26(6), p. 371.

Christoffersen, H. and Gulbrandsen, D. (2011) Investigation of a new tech bubble.

Copenhagen Business School.

Clarke, J., Jandik, T. and Mandelker, G. (2001) ‘The efficient markets hypothesis’, Expert
financial planning: Advice from industry leaders. John Wiley & Sons, Inc. New York, 7(3/4),
pp. 126–141.

Cochrane, J. H. (2002) Stocks as money: Convenience yield and the tech-stock bubble.
National bureau of economic research.

Corporate Financial Institute (2020a) Dow Jones Industrial Average, Corporate Finance
Institute. Available at: https://corporatefinanceinstitute.com/resources/knowledge/trading-
investing/dow-jones-industrial-average-djia/ (Accessed: 27 August 2020).

Corporate Financial Institute (2020b) NASDAQ Composite, Corporate Finance Institute.

Available at: https://corporatefinanceinstitute.com/resources/knowledge/trading-
investing/nasdaq-composite/ (Accessed: 26 August 2020).

Corporate Financial Institute (2020c) Price to Sales Ratio, Corporate Finance Institute.
Available at: https://corporatefinanceinstitute.com/resources/knowledge/valuation/price-to-
sales-ratio/ (Accessed: 30 August 2020).

Crosby, M. and Bodman, P. (2005) ‘When the US Sneezes, Do We Need to Catch a Cold?
Historical and Future Linkages between the Australian and US Business Cycles’, The
Changing Nature of the Business Cycle, p. 226.

Crunchbase (2020) Organizations. Available at:

https://www.crunchbase.com/organization/uber (Accessed: 29 September 2020).

Cunningham, J. A. and Whalley, J. (2020) The Internet of Things Entrepreneurial

Ecosystems. Springer.

Damodaran, A. (2009) ‘Valuing young, start-up and growth companies: estimation issues
and valuation challenges’, Available at SSRN 1418687.

DeLong, B. (2009) ‘Charles Kindleberger: Anatomy of a Typical Financial Crisis’.

DeLong, J. B. and Magin, K. (2006) A short note on the size of the dot-com bubble. National
Bureau of Economic Research.

de Pinho, M. R. M. (2013) Is Internet industry facing a bubble 2.0? University of Porto.

Eikon, T. R. (2018) ‘Thomson reuters eikon’, Available at: Subscription Service (Accessed:
August 2018).

Espinasse, P. (2014) IPO: A global guide. Hong Kong University Press.

Evanoff, D. D., Kaufman, G. G. and Malliaris, A. G. (2012) ‘Asset price bubbles: What are
the causes, consequences, and public policy options?’, Chicago Fed Letter, (Nov).

Fama, E. F. (1995) ‘Random walks in stock market prices’, Financial analysts journal. Taylor
& Francis, 51(1), pp. 75–80.

126
Fetiniuc, V., Ivan, L. and Gherbovej, S. (2014) ‘Speculative Bubbles And Financial Crises’.

Fidelity Investments (2020) Earnings per share (EPS). Available at:

https://www.fidelity.com/webcontent/ap010098-etf-
content/18.01/help/research/learn_er_glossary_1.shtml#earningspersharettm (Accessed: 3
October 2020).

Forjan, J. (2019) Weighting Methods Used in Index Construction. Available at:

https://analystprep.com/cfa-level-1-exam/equity/different-weighting-methods-used-index-
construction/ (Accessed: 7 November 2020).

Frazee, G. (2018) ‘6 factors that fueled the stock market dive in 2018’, PBS NewsHour.

Geier, B. (2015) What did we learn from the dotcom stock bubble of 2000?, Time Magazine.

Goodnight, G. T. and Green, S. (2010) ‘Rhetoric, risk, and markets: The dot-com bubble’,
Quarterly Journal of Speech. Taylor & Francis, 96(2), pp. 115–140.

Gottwald, R. (2012) ‘The use of the P/E ratio to stock valuation’, European Grants Projects
Journals, 2012, pp. 21–24.

Gray, D. E. (2019) Doing research in the business world. SAGE Publications Limited.

Green, M. B. (2004) ‘Venture Capital Investment in the United States 1995-2002.’, Industrial
Geographer. Citeseer, 2(1).

Hope, M. (2015) ‘Year of Discord: French-US Relations, April 1973–June 1974’. Vanderbilt
University.

Hughes, P. J. and Thakor, A. V (1992) ‘Litigation risk, intermediation, and the underpricing of
initial public offerings’, The Review of Financial Studies. Oxford University Press, 5(4), pp.
709–742.

Hurt, C. (2004) ‘Moral hazard and the initial public offering’, Cardozo L. Rev. HeinOnline, 26,
p. 711.

Ibbotson, R. G. (1975) ‘Price performance of common stock new issues’, Journal of financial
economics. Elsevier, 2(3), pp. 235–272.

Isaksson, A. (2006) ‘Studies on the venture capital process’. Handelshögskolan vid Umeå
universitet.

ISIN (2020) ISIN Organization: international securities identification numbers organization.

Jalil, M. M. (2013) ‘Practical Guidelines for conducting research’, Donor Committee for
Enterprise Development.

Jenkinson, T. and Ljungqvist, A. (2001) Going public: The theory and evidence on how
companies raise equity finance. Oxford University Press on Demand.

Jensen, M. C. (1978) ‘Some anomalous evidence regarding market efficiency’, Journal of

financial economics, 6(2/3), pp. 95–101.

Jiménez, Á. (2011) Understanding economic bubbles. Universitat Autònoma de Barcelona.

Johnsson, M., Lindblom, H. and Platan, P. (2002) ‘Behavioral finance-and the change of

127
investor behavior during and after the speculative bubble at the end of the 1990s’.

Jones, B. (2015) Asset bubbles: re-thinking policy for the age of asset management, IMF
Working Papers.

Junarsin, E. (2011) ‘Under pricing in initial public offering’, Am. J. Soc. Mgmt. Sci, 2(3), pp.
316–324.

Juneja, P. (2020) Secondary Data: Meaning, Its Advantages and Disadvantages.,

Management Study Guide. Available at: https://www.managementstudyguide.com/…
(Accessed: 24 August 2020).

Kashkari, N. (2017) Monetary Policy and Bubbles, Federal Reserve Bank of Minneapolis.
Available at: https://www.minneapolisfed.org/article/2017/monetary-policy-and-bubbles.

Kennard, F. and Hanne, A. (2015) ‘Boom and bust: A look at the economic bubbles (17th
century–21st century)’, Asheville, North Carolina: Hershel Williams.

Kenney, M. and Zysman, J. (2019) ‘Unicorns, Cheshire cats, and the new dilemmas of
entrepreneurial finance’, Venture Capital. Taylor & Francis, 21(1), pp. 35–50.

Kennon, J. (2020) What Is the Nasdaq?, The Balance. Available at:

https://www.thebalance.com/what-is-the-nasdaq-356343#citation-8 (Accessed: 7 November
2020).

Khan, T. R., Islam, M., Choudhury, T.T. and Adnan, A. M. (2014) ‘How earning per share
(EPS) affects on share price and firm value’. European Journal of Business and
Management.

Kilburg, J. (2019) We Haven’t Always Loved Tech Stocks, CME Group. Available at:
https://www.thestreet.com/markets/we-have-not-always-loved-tech-stocks-15059138
(Accessed: 29 March 2020).

Kile, C. O. and Phillips, M. E. (2009) ‘Using industry classification codes to sample high-
technology firms: Analysis and recommendations’, Journal of Accounting, Auditing &
Finance. SAGE Publications Sage CA: Los Angeles, CA, 24(1), pp. 35–58.

Kindleberger, C. (1987) ‘Bubbles, The New Palgrave: A Dictionary of Economics, John

Eatwell, Murray Milgate, and Peter Newman, eds’.

Kirkpatrick, C. D. and Dahlquist, J. A. (2010) Technical analysis: the complete resource for
financial market technicians. FT press.

Kiska Jr, A. (2018) Central European Startup Guide. Credo Ventures.

Komáromi, G. (2006) Anatomy of stock market bubbles. ICFAI UP.

Kortian, T. (1995) Modern approaches to asset price formation: a survey of recent theoretical
literature. Economic Research Department, Reserve Bank of Australia.

Kothari, C. R. (2004) Research methodology: Methods and techniques. New Age

International.

Kubicová, I. and Komárek, L. (2011) ‘The classification and identification of asset price
bubbles’, Finance a Uver - Czech Journal of Economics and Finance, (61(1)), pp. 34–48.

128
Kumar, B. (2012) Capital Market. Edition: 1. Excel Books India.

Kumar, N., Mohapatra, S. and Sandhu, G. (2013) ‘Importance of technical and fundamental
analysis and other strategic factors in the Indian stock market’, Management Review: An
International Journal. Institute for Operations Research and the Management Sciences,
Korea Chapter …, 8(1), p. 38.

Lakos, G. and Szendrei, T. (2017) ‘Explanations of Asset Price Bubbles’, Financial and
Economic Review, 16(4), pp. 122–150.

Le Bris, D. (2016) ‘Irrational exuberance. Revised and expanded third edition’. JSTOR.

Lee, A. (2013) Welcome to the unicorn club: Learning from billion-dollar startups, Cowboy
Ventures (blog). Available at: https://cowboyvc.tumblr.com/post/65804808731/welcome-to-
the-unicorn-club-learning-from (Accessed: 17 September 2020).

Lemstra, W. (2006) ‘The Internet bubble and the impact on the development path of the
telecommunication sector’. Industry-Insights BV.

Levine, S. S. and Zajac, E. J. (2007) ‘The institutional nature of price bubbles’, American
Economic Association, (SSRN 960178).

Levine, T. R. (2014) Encyclopedia of deception. Sage Publications.

Li, Y. (2019) Goldman Sachs is sounding the alarm: Technology stocks are overvalued,
CNBC. Available at: https://www.cnbc.com/2019/06/17/goldman-sachs-technology-stocks-
are-overvalued.html.

Lienkamp, S. and Koepsell, H. (2015) Dot-com bubble 2.0? Copenhagen Business School.

Liu, T., Santoni, G. J. and Stone, C. C. (1995) ‘In search of stock market bubbles: a
comment on rappoport and white’, The Journal of Economic History. JSTOR, 55(3), pp. 647–
654.

Ljungqvist, A. (2007) ‘IPO underpricing’, in Handbook of Empirical Corporate Finance.

Elsevier, pp. 375–422.

Ljungqvist, A. and Wilhelm Jr, W. J. (2003) ‘IPO pricing in the dot-com bubble’, The Journal
of Finance. Wiley Online Library, 58(2), pp. 723–752.

Ljungqvist, A. and Wilhelm Jr, W. J. (2005) ‘Does prospect theory explain IPO market
behavior?’, The Journal of Finance. Wiley Online Library, 60(4), pp. 1759–1790.

Lo, A. W. and MacKinlay, A. C. (2011) A non-random walk down Wall Street. Princeton
University Press.

Loughran, T. and Ritter, J. (2004) ‘Why has IPO underpricing changed over time?’, Financial
management. JSTOR, pp. 5–37.

Loughran, T. and Ritter, J. R. (2002) ‘Why don’t issuers get upset about leaving money on
the table in IPOs?’, The Review of Financial Studies. Oxford University Press, 15(2), pp.
413–444.

Lowry, M. and Shu, S. (2002) ‘Litigation risk and IPO underpricing’, Journal of Financial
Economics. Elsevier, 65(3), pp. 309–335.

129
Luenendonk, M. (2019) When you know you are in a Tech Bubble, Cleverism. Available at:
https://www.cleverism.com/when-you-are-tech-bubble/ (Accessed: 27 August 2020).

Lumen (2020) A Single Population Mean using the Student t Distribution, Lumen Learning.
Available at: https://courses.lumenlearning.com/introstats1/chapter/a-single-population-
mean-using-the-student-t-distribution/ (Accessed: 16 November 2020).

Macrotrends (2020) Federal Funds Rate - 62 Year Historical Chart. Available at:
https://www.macrotrends.net/2015/fed-funds-rate-historical-chart (Accessed: 9 November
2020).

Marangu, K. and Jagongo, A. (2014) ‘Price to book value ratio and financial statement
variables (An empirical study of companies quoted at Nairobi securities exchange, Kenya)’,
Global Journal of Commerce & Management Perspective, 3(6), pp. 50–56.

Marples, A. (2020) The South Sea Bubble of 1720, The National Archives. Available at:
https://blog.nationalarchives.gov.uk/the-south-sea-bubble-of-1720/ (Accessed: 7 November
2020).

Masoud, N. M. H. (2013) ‘The impact of stock market performance upon economic growth’,
International Journal of Economics and Financial Issues. Econjournals, 3(4), p. 788.

McCullough, B. (2015) 20 Years On: Why Netscape’s IPO was the “Big Bang” of the internet
era, Internet History Podcast. Available at:
http://www.internethistorypodcast.com/2015/08/20-years-on-why-netscapes-ipo-was-the-big-
bang-of-the-internet-era/ (Accessed: 21 August 2020).

Meltzer, A. H. (2003) ‘Rational and nonrational bubbles’, Asset Price Bubbles: The
Implications for Monetary, Regulatory, and International Policies, Cambridge, pp. 23–33.

Mertler, C. A. (2018) Introduction to educational research. Sage publications.

Michel, J. (2014) ‘Return on Recent VC Investment and Long–Run IPO Returns’,

Entrepreneurship Theory and Practice. SAGE Publications Sage CA: Los Angeles, CA,
38(3), pp. 527–549.

Mizuno, T., Ohnishi, T. and Watanabe, T. (2016) ‘Power laws in market capitalization during
the Dot-com and Shanghai bubble periods’, Evolutionary and Institutional Economics
Review. Springer, 13(2), pp. 445–454.

Nasdaq Inc (2020) Nasdaq Global Indexes. Available at:

https://www.nasdaq.com/solutions/u.s.-indexes-complete-view-of-u.s.-equities-market-data
(Accessed: 26 August 2020).

New York Stock Exchange (2020) Total Market Cap. Available at:
https://www.nyse.com/market-cap (Accessed: 7 November 2020).

Nielsson, U. and Wójcik, D. (2016) ‘Proximity and IPO underpricing’, Journal of Corporate
Finance. Elsevier, 38, pp. 92–105.

Nikolic, L. (2019) ‘A Tale of Two Bubbles: How the Fed Crashed the Tech and the Housing
Markets’, Foundation of Economic Education. Available at: https://fee.org/articles/a-tale-of-
two-bubbles-how-the-fed-crashed-the-tech-and-the-housing-markets/.

Nneji, O., Brooks, C. and Ward, C. (2013) ‘Intrinsic and rational speculative bubbles in the

130
US housing market: 1960-2011’, Journal of Real Estate Research, 35(2), pp. 121–151.

NYSE (2018) NYSE Arca Tech 100 Index (PSE). Available at:
https://www.nyse.com/publicdocs/nyse/indices/nyse_arca_tech100_index_guidelines.pdf
(Accessed: 26 August 2020).

O’Dwyer, L. M. and Bernauer, J. A. (2013) Quantitative research for the qualitative

researcher. SAGE publications.

Odean, T. (1998) ‘Volume, volatility, price, and profit when all traders are above average’,
The journal of finance. Wiley Online Library, 53(6), pp. 1887–1934.

Ofek, E. and Richardson, M. (2003) ‘Dotcom mania: The rise and fall of internet stock
prices’, The Journal of Finance. Wiley Online Library, 58(3), pp. 1113–1137.

Omoruyi, A. and Hassan, O. O. (2017) ‘Speculative Bubbles in Stock Market: Evidence from
Nigeria’, Journal of Economics & Finance, 1(1), p. 271.

Paping, F. H. (2017) The Next Tech Bubble? Erasmus University Rotterdam.

Pastor, L. and Veronesi, P. (2003) Stock prices and IPO waves. National Bureau of
Economic Research.

Pinheiro, R., de Carvalho, A. G. and Sampaio, J. O. (2016) The Dotcom Bubble and
Underpricing: Conjectures and Evidence. Federal Reserve Bank of Cleveland.

Pitchbook Data (2019) Unicorn Report 2019. Available at:

https://pitchbook.com/news/reports/2019-unicorn-report (Accessed: 28 September 2020).

Porras, E. (2016) Bubbles and Contagion in Financial Markets, Volume 1: An Integrative

View. Springer.

Prosad, J. M. (2014) ‘Impact of Investors Behavioral Biases on the Indian Equity Market and
Implications on Stock Selection Decisions: An Empirical Analysis’. Noida.

PwC (2020) PwC/CB Insights MoneyTree Report. Available at:

https://www.pwc.com/us/en/industries/technology/moneytree.html (Accessed: 17 September
2020).

Remenyi, D., Williams, B., Money, A. and Swartz, E. (2010) Doing research in business and
management: an introduction to process and method. Sage.

Ritter, J. R. (2020) ‘Initial public offerings: Updated statistics’, Retrieved on 10 March 2020.
Available at: https://site.warrington.ufl.edu/ritter/ipo-data/.

Ritter, J. R. and Welch, I. (2002) ‘A review of IPO activity, pricing, and allocations’, The
journal of Finance. Wiley Online Library, 57(4), pp. 1795–1828.

Rock, K. (1986) ‘Why new issues are underpriced’, Journal of financial economics. North-
Holland, 15(1–2), pp. 187–212.

Rodriguez, S. (2015) ‘The real reason everyone calls billion-dollar startups “unicorns.”’,
International Business Times.

S&P Dow Jones Indices LLC (2020) S&P Dow Jones Indices. Available at:
https://www.spglobal.com/spdji/en/indices/equity/ (Accessed: 27 August 2020).

131
Sardana, S. (2013) Helping to Protect your Investments from Bond Bubbles and Runaway
Stocks. Available at: https://www.forbes.com/sites/sanjeevsardana/2013/04/22/helping-to-
protect-your-investments-from-bond-bubbles-and-runaway-stocks/ (Accessed: 7 June 2020).

Saunders, M., Lewis, P. and Thornhill, A. (2015) Research methods for business students.
Pearson education.

Scheinkman, J. A. and Xiong, W. (2003) ‘Overconfidence and speculative bubbles’, Journal

of political Economy. The University of Chicago Press, 111(6), pp. 1183–1220.

Scott III, R. H. (2010) ‘Bloomberg 101’, Journal of Financial Education. JSTOR, pp. 80–88.

Shiller, R. J. (1995) ‘Conversation, information, and herd behavior’, The American economic
review. JSTOR, 85(2), pp. 181–185.

Shiller, R. J. (2001) ‘Bubbles, human judgment, and expert opinion’, Cowles Foundation
Discussion Paper No. 1303, Yale University.

Shiller, R. J. (2015) Irrational exuberance: Revised and expanded third edition. Princeton
university press.

Shleifer, A. (2000) Inefficient markets: An introduction to behavioural finance. OUP Oxford.

Siegel, P. (2015) Has Sarbanes-Oxley Changed the Financing of Companies and Allocation
of Capital Markets. Available at: http://www.jgbm.org/page/12 John OShaughnessy.pdf
(Accessed: 12 November 2020).

Sousa, M. and Pinho, M. (2014) Is Internet industry facing an IPO bubble 2.0? University of
Porto.

Stoughton, N. M. and Zechner, J. (1998) ‘IPO-mechanisms, monitoring and ownership

structure’, Journal of Financial Economics. Elsevier, 49(1), pp. 45–77.

Su, X., Zhang, D. and Zhang, X. (2020) Why Don’t Issuers Get Upset About IPO
Underpricing: Evidence from the Loan Market. Norwegian School of Economics.

Taipalus, K. (2012) Detecting asset price bubbles with time-series methods. Helsinki: Bank
of Finland.

U.S. Securities and Exchange Commission (2002) SECURITIES AND EXCHANGE

COMMISSION V. CREDIT SUISSE FIRST BOSTON CORPORATION, , 02 CV 00090 (
RWR) (D.D.C.). Available at: http://www.sec.gov/litigation/litreleases/lr17327.htm (Accessed:
5 September 2020).

Valliere, D. and Peterson, R. (2004) ‘Inflating the bubble: examining dot-com investor
behaviour’, Venture Capital. Taylor & Francis, 6(1), pp. 1–22.

van de Hoef, M. (2011) Facing a Second Internet Bubble. University of Amsterdam.

Van Ooteghem, G. (2016) Is the Internet facing a Bubble 2.0? Université catholique de
Louvain.

Vogel, H. L. (2010) Financial Market Bubbles and Crashes: Features, Causes, and Effects.
Cambridge University Press.

Wall Strategies (2020) The Tech Stock Crash – Are We in the Second “Dot-com Bubble”?

132
Available at: https://wallstrategies.com/are-we-in-a-second-dotcom-bubble/ (Accessed: 6
November 2020).

Watson, R. (2015) ‘Quantitative research’, Nursing Standard. RCN Publishing, 29(31).

Welch, I. (1992) ‘Sequential sales, learning, and cascades’, The Journal of finance. Wiley
Online Library, 47(2), pp. 695–732.

Wigniolle, B. (2014) ‘Optimism, pessimism and financial bubbles’, Journal of Economic

Dynamics and Control. Elsevier, 41, pp. 188–208.

Xiong, W. (2013) Bubbles, crises, and heterogeneous beliefs. Working Paper 18905.

Yale School of Management (2020a) Prof. Robert Shiller’s U.S. Crash Confidence Index.
Available at: https://som.yale.edu/blog/prof-robert-shillers-us-crash-confidence-index
(Accessed: 9 November 2020).

Yale School of Management (2020b) United States Stock Market Confidence Indices.
Available at: https://som.yale.edu/faculty-research-centers/centers-initiatives/international-
center-for-finance/data/stock-market-confidence-indices/united-states-stock-market-
confidence-indices (Accessed: 9 November 2020).

Yang, Q. (2006) ‘Stock bubbles: The theory and estimation’. Brunel University Brunel
Business School PhD Theses.

Young, J. (2020) Market Index, Investopedia. Available at:

https://www.investopedia.com/terms/m/marketindex.asp (Accessed: 7 November 2020).

133
Appendices:

Appendix 1: Descriptive statistics relating to the time series data

utilised within the analysis of the U.S. indices for the period
1996 to 2001 collected from the Bloomberg database

Index Obs. Mean Median Minimum Maximum Standard deviation

CCMP: Weekly closing price (USD) 313 2164.57 1868.96 1008.23 5048.62 939.34

CCMP: Earnings per share (USD) 72 33.12 51.83 -145.64 87.09 58.46

CCMP: Price-to-earnings ratio 72 51.11 25.59 0 202.01 55.38

IXK: Weekly closing price (USD) 313 1090.39 878.58 344.29 2964.66 631.01

IXK: Earnings per share (USD) 72 31.63 43.09 -59.30 79.10 33.37

IXK: Price-to-earnings ratio 72 30.83 12.56 0 144.91 36.58

IXK: Price-to-sales ratio 72 4.20 3.29 0.74 12.28 3.29

IXK: Price-to-book ratio 72 4.98 4.14 0.98 12.95 3.01

PSE: Weekly closing price (USD) 313 531.40 449.21 188.39 1245.68 295.24

S5INFT: Weekly closing price (USD) 313 410.87 350.29 131.17 980.54 213.98

S5INFT: Earnings per share (USD) 72 10.05 9.88 4.95 14.75 2.52

S5INFT: Price-to-earnings ratio 72 39.16 34.87 21.21 73.07 14.11

S5INFT: Price-to-sales ratio 72 3.39 2.93 1.54 7.29 1.54

S5INFT: Price-to-book ratio 72 6.76 6.38 3.59 12.30 2.43

SPX: Weekly closing price (USD) 313 1095.99 1133.20 601.81 1527.46 267.69

SPX: Earnings per share (USD) 72 45.00 43.97 34.57 55.35 6.09

SPX: Price-to-earnings ratio 72 24.05 24.07 17.96 29.83 3.53

SPX: Price-to-sales ratio 72 1.75 1.76 1.17 2.27 0.34

SPX: Price-to-book ratio 72 3.97 3.90 2.91 4.98 0.65

INDU: Weekly closing price (USD) 313 8865.03 9167.49 5061.12 11722.98 1883.59

INDU: Earnings per share (USD) 72 502.75 483.55 389.30 644.42 67.41

INDU: Price-to-earnings ratio 72 18.19 19.66 8.98 27.13 5.18

INDU: Price-to-sales ratio 72 1.31 1.36 0.65 1.99 0.38

INDU: Price-to-book ratio 72 3.63 3.83 1.95 5.25 0.99

Source: Bloomberg

134
Appendix 2: Descriptive statistics relating to the time series data
utilised within the analysis of the U.S. indices for the period
2014 to 2019 collected from the Bloomberg database

Index Obs. Mean Median Minimum Maximum Standard deviation

CCMP: Weekly closing price (USD) 313 5982.31 5462.69 3999.73 9006.62 1375.66

CCMP: Earnings per share (USD) 72 183.08 178.21 113.25 270.72 42.57

CCMP: Price-to-earnings ratio 72 33.09 31.93 25.37 43.31 4.16

CCMP: Price-to-sales ratio 72 2.51 2.42 1.90 3.15 0.29

CCMP: Price-to-book ratio 72 3.91 3.86 2.42 5.20 0.49

IXK: Weekly closing price (USD) 313 3377.26 2972.93 1988.66 5898.17 1033.99

IXK: Earnings per share (USD) 72 -80.77 122.14 -3018.14 208.07 759.42

IXK: Price-to-earnings ratio 72 21.63 22.83 0 28.25 6.40

IXK: Price-to-sales ratio 72 3.82 3.70 1.94 5.30 0.70

IXK: Price-to-book ratio 72 4.69 4.35 3.33 6.89 0.99

PSE: Weekly closing price (USD) 313 2469.69 2174.49 1708.31 3765.64 600.33

PSE: Earnings per share (USD) 72 104.87 92.50 72.52 146.18 23.54

PSE: Price-to-earnings ratio 72 23.61 23,73 19.42 27.28 1.61

PSE: Price-to-sales ratio 72 3.19 3.11 2.61 3.94 0.36

PSE: Price-to-book ratio 72 4.58 4.43 3.43 5.84 0.76

S5INFT: Weekly closing price (USD) 313 937.01 819.84 570.33 1614.70 281.39

S5INFT: Earnings per share (USD) 72 45.17 39.14 33.03 63.66 10.62

S5INFT: Price-to-earnings ratio 72 20.63 20.61 16.79 25.93 2.26

S5INFT: Price-to-sales ratio 72 3.84 3.72 2.89 5.03 0.58

S5INFT: Price-to-book ratio 72 5.09 4.41 3.45 7.65 1.26

NDXT: Weekly closing price (USD) 313 3207.31 2922.05 1883.21 5480.09 1004.97

NDXT: Earnings per share (USD) 72 144.59 111.23 87.09 237.48 49.27

NDXT: Price-to-earnings ratio 72 22.65 22.47 16.11 30.54 2.73

NDXT: Price-to-sales ratio 72 3.67 3.60 2.88 4.76 0.54

NDXT: Price-to-book ratio 72 4.23 3.97 3.04 6.18 0.79

SPX: Weekly closing price (USD) 313 2365.60 2263.79 1782.59 3240.02 382.42

SPX: Earnings per share (USD) 72 121.84 112.54 105.50 152.29 16.94

135
 SPX: Price-to-earnings ratio 72 19.46 19.45 16.62 22.88 1.49

SPX: Price-to-sales ratio 72 1.99 1.97 1.63 2.33 0.19

SPX: Price-to-book ratio 72 3.00 2.94 2.50 3.55 0.29

INDU: Weekly closing price (USD) 313 20911.53 19843.41 15698.85 28645.26 3886.12

INDU: Earnings per share (USD) 72 1213.32 1138.96 1043.29 1543.67 167.56

INDU: Price-to-earnings ratio 72 17.23 17.22 14.52 21.13 1.64

INDU: Price-to-sales ratio 72 1.91 1.88 1.66 2.33 0.16

INDU: Price-to-book ratio 72 3.43 3.40 2.74 4.25 0.46

Source: Bloomberg

136
Appendix 3: High technology companies SIC codes

Industry SIC Code

Special industry machinery 3559

Computer hardware 3571, 3572, 3575, 3576, 3577, 3578

Communications equipment 3661, 3663, 3669

Electronics 3671, 3672, 3674, 3675, 3677, 3678, 3679

Navigation equipment 3812

Measuring and controlling devices 3823, 3825, 3826, 3827, 3829

Medical instruments 3841, 3845

Telephone equipment 4812, 4813

Communication services 4899

Software 7371, 7372, 7373, 7374, 7375, 7378, 7379

Services 7389

Source: Own deductions

137
Appendix 4: Price-to-earnings ratio graphs

Price-to-earnings ratios of NASDAQ Composite Index (CCMP) versus S&P 500 Index
(SPX) and Dow Jones Industrial Average (INDU) from 1996 to 2001.

Price-to-earnings ratios of NASDAQ Computer Index (IXK) versus S&P 500 Index (SPX)
and Dow Jones Industrial Average (INDU) from 1996 to 2001.

138
Price-to-earnings ratios of S&P500 Information Technology Sector (S5INFT) versus
S&P 500 Index (SPX) and Dow Jones Industrial Average (INDU) from 1996 to 2001.

Price-to-earnings ratios of NASDAQ Composite Index (CCMP) versus S&P 500 Index
(SPX) and Dow Jones Industrial Average (INDU) from 2014 to 2019.

139
Price-to-earnings ratios of NASDAQ Computer Index (IXK) versus S&P 500 Index (SPX)
and Dow Jones Industrial Average (INDU) from 2014 to 2019.

Price-to-earnings ratios of NYSE Arca Tech 100 Index (PSE) versus S&P 500 Index
(SPX) and Dow Jones Industrial Average (INDU) from 2014 to 2019.

140
Price-to-earnings ratios of S&P500 Information Technology Sector (S5INFT) versus
S&P 500 Index (SPX) and Dow Jones Industrial Average (INDU) from 2014 to 2019.

Price-to-earnings ratios of NASDAQ-100 Technology Sector (NDXT) versus S&P 500

Index (SPX) and Dow Jones Industrial Average (INDU) from 2014 to 2019.

141
Appendix 5: Price-to-sales ratio graphs

Price-to-sales ratios of NASDAQ Computer Index (IXK) versus S&P 500 Index (SPX) and
Dow Jones Industrial Average (INDU) from 1996 to 2001.

Price-to-sales ratios of S&P500 Information Technology Sector (S5INFT) versus S&P

500 Index (SPX) and Dow Jones Industrial Average (INDU) from 1996 to 2001.

142
Price-to-sales ratios of NASDAQ Composite Index (CCMP) versus S&P 500 Index (SPX)
and Dow Jones Industrial Average (INDU) from 2014 to 2019.

Price-to-sales ratios of NASDAQ Computer Index (IXK) versus S&P 500 Index (SPX) and
Dow Jones Industrial Average (INDU) from 2014 to 2019.

143
Price-to-sales ratios of NYSE Arca Tech 100 Index (PSE) versus S&P 500 Index (SPX)
and Dow Jones Industrial Average (INDU) from 2014 to 2019.

Price-to-sales ratios of S&P500 Information Technology Sector (S5INFT) versus S&P

500 Index (SPX) and Dow Jones Industrial Average (INDU) from 2014 to 2019.

144
Price-to-sales ratios of NASDAQ-100 Technology Sector (NDXT) versus S&P 500 Index
(SPX) and Dow Jones Industrial Average (INDU) from 2014 to 2019.

145
Appendix 6: Price-to-book ratio graphs

Price-to-book ratios of NASDAQ Computer Index (IXK) versus S&P 500 Index (SPX) and
Dow Jones Industrial Average (INDU) from 1996 to 2001.

Price-to-book ratios of S&P500 Information Technology Sector (S5INFT) versus S&P

500 Index (SPX) and Dow Jones Industrial Average (INDU) from 1996 to 2001.

146
Price-to-book ratios of NASDAQ Composite Index (CCMP) versus S&P 500 Index (SPX)
and Dow Jones Industrial Average (INDU) from 2014 to 2019.

Price-to-book ratios of NASDAQ Computer Index (IXK) versus S&P 500 Index (SPX) and
Dow Jones Industrial Average (INDU) from 2014 to 2019.

147
Price-to-book ratios of NYSE Arca Tech 100 Index (PSE) versus S&P 500 Index (SPX)
and Dow Jones Industrial Average (INDU) from 2014 to 2019.

Price-to-book ratios of S&P500 Information Technology Sector (S5INFT) versus S&P

500 Index (SPX) and Dow Jones Industrial Average (INDU) from 2014 to 2019.

148
Price-to-book ratios of NASDAQ-100 Technology Sector (NDXT) versus S&P 500 Index
(SPX) and Dow Jones Industrial Average (INDU) from 2014 to 2019.

149
 ProQuest Number: 28935460

INFORMATION TO ALL USERS

The quality and completeness of this reproduction is dependent on the quality
and completeness of the copy made available to ProQuest.

Distributed by ProQuest LLC ( 2021 ).

Copyright of the Dissertation is held by the Author unless otherwise noted.

This work may be used in accordance with the terms of the Creative Commons license
or other rights statement, as indicated in the copyright statement or in the metadata
associated with this work. Unless otherwise specified in the copyright statement
or the metadata, all rights are reserved by the copyright holder.

This work is protected against unauthorized copying under Title 17,

United States Code and other applicable copyright laws.

Microform Edition where available © ProQuest LLC. No reproduction or digitization

of the Microform Edition is authorized without permission of ProQuest LLC.

ProQuest LLC
789 East Eisenhower Parkway
P.O. Box 1346
Ann Arbor, MI 48106 - 1346 USA