Responsible Financial Media: Lessons from the Internet Bubble By Andrew Howard W'20

The Internet bubble of the late 1990s, otherwise known as the “Dot-com Bubble,” erased billions of dollars from the economy seemingly overnight. The NASDAQ, a market index of technology and biotech companies, fell nearly 4,000 points from March, 2000 through October, 2002. This collapse demonstrated how a massive scheme of mispricing, accounting fraud, and the unjustifiable promotion of digital products and services brought down the entire technology sector. The crash was so far-reaching that even successful companies like Amazon and Cisco lost nearly 90% of their market value; their value diluted by the plethora of overvalued companies that had never earned a single dollar for their investors. Similarly, the majority of companies with artificially inflated prices were ostensibly worthless:,, Nortel, and even all had market capitalizations of zero after the crash.


How is it possible that such companies were valued at billions of dollars before turning any profit? Why were institutional and individual investors incentivized to back companies they could not understand? One proposed answer pinpoints the popularization of the financial media as a leading culprit. Indeed, Bloomberg and CNBC rose to prominence in 1996 and 1990 respectively, signifying the rise of the importance of financial media at the height of the bubble.


Within the financial media, columnists and reporters held the power to change the market capitalization of a stock by adding it to either the “buy” or “sell” list. During this period, when a reporter published a purchase recommendation for an internet company - regardless of its actual merit - average investors with limited information would inflate its price by buying in. The work of behavioral economists like Robert Shiller demonstrates that news media biases shape investor behavior and consumer sentiment. Shiller concludes that rational-market behavior is dependent upon accurate information. However, Shiller claims, when the media ignores its assumed fiduciary responsibility to its readership, the market is unable to correct overvalued companies and prices subsequently spiral out of control.


It is no coincidence, therefore, that the financial media published more stories about technology companies during the Dot-com bubble than any other industry combined[1]. As a corollary to the popularization of financial news media, two new financial publications – Business 2.0 and Red Herring - emerged and shuttered during the period of the Internet bubble from 1996-2002, highlighting the unstable dynamic cultivated by the emergent demand for financial reporting. Even more mainstream organizations like CNBC and the Wall Street Journal increased their coverage on IPO’s by nearly 1000% relative to the actual number of new companies that went public during this time.  However, even more troubling than the prevalence of the financial news disseminated throughout this period was the magnitude of its measurable impact on market capitalization. Average investors depended on widely read analysts to publish lists of stock recommendations, classifying companies as either “buy,” “hold,” or “sell.” Alarmingly, during the 1996-2000 period, only 1% of published stocks were classified as “sell,” while 70% were classified as “buy.” Two of the most famous analysts of the time, Morgan Stanley’s Mary Meeker and Merrill Lynch’s Henry Blodget, became business media celebrities for their market insights. Most troublingly, investigations into compensation packages revealed that analysts were given higher bonuses if they classified a company as “buy” – highlighting the biases and external motivators of those releasing stock recommendations, and emphasizing the role the news played in promoting the bubble.


In a comparison of IPO’s between Internet and non-Internet stocks over the four-year period, a study in the Journal of Financial Analysis made an astonishing discovery:


“Internet firms average a stunning 84% initial return during our sample period, more than twice the return for non-Internet firms. The Internet IPO sample also had a cumulative return of 2,016% from January 1, 1997, to March 24, 2000, whereas the non-Internet IPO sample had a return of only 370%. The difference is an astonishing 1,646%.”


Outside of the realm of IPO’s, Internet stocks also enjoyed advantages causally related to their specific classification. Research from Purdue University shows that a sample of 63 companies who changed their names saw an average stock price increase of 125% relative to their peers within five days. The implications of this finding suggest that non-technology companies could multiply their market capitalizations simply by placing a technology-related buzzword in their name.


Eventually, however, the supply of non-traditional, inexperienced, and lesser informed investors ready to overpay for worthless stocks disappeared, and with them, the artificial over-inflation of American technology companies. The average loss per household in the United States, as a result of the crash, was a shocking $63,500. The subsequent recession caused millions of Americans to lose their jobs, and Henry Paulson of Goldman Sachs estimated that investors lost over 7 trillion USD from the bubble’s devastation in March, 2000.


Drawing lessons from this crash to contemporary market behavior, with private companies like Snapchat, Uber, and Airbnb achieving current multi-billion dollar valuations, it is reasonable to question whether we are living in a similar bubble today. Indeed, these unicorn stocks are no longer uncommon – according to the Wall Street Journal, at least 145 private companies have achieved valuations of over $1 billion! Additional signs of concern spotlight the declining access to venture capital, and falling valuations across various industries. For example, Gawker recently leaked an income statement for Snapchat for the year of 2014: The supposedly $20-25 billion company reported earnings of just $3.1 million.

If we are to prevent another collapse, we must not forget the fundamentals of value investing when selecting stocks. Healthy skepticism, acknowledgment of risk, and a wide array of responsible financial reporting are necessary to protect the American public from the biases and misinformation of the financial news media. Without this formula, we may be looking back at Snapchat the same way we view today. Investors, be careful out there. The market is irrational.

[1] Journal of Financial and Quantitative Analysis, 2009