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An International Meeting of American Accounting
Association
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Financial Analysts’ Role in the 1996-2000 Internet Bubble |
Patricia C O’Brien
University of Waterloo
Yao Tian
University of Waterloo
Abstract: We investigate financial analysts’ role in the 1996-2000 “Internet Bubble,” comparing their recommendations in this sector to those for other new companies in the same period. Our research addresses the following two questions: (1) were financial analysts relatively more optimistic about Internet stocks than about other new issues during 1996-2000? and (2) did their relative optimism for Internet stocks (if it existed) inflate the prices of these stocks, creating or fueling the Internet Bubble? By using other new issues in this time period as our comparison group, we control for analysts’ documented optimism when initiating coverage and around equity issues. We find evidence that analysts made higher recommendations for Internet stocks than for other new issues, beginning in 1998. We also find a significant relation between analyst optimism and subsequent stock returns, particularly in the Internet sector.