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New Economy or Irrational Exuberance: An Empirical Study of Market Valuations Surrounding the Dot-Com Bubble of the 1990s
John J Morris,
Kent State University
Pervaiz Alam, Kent State University
ABSTRACT. During the dot-com bubble of the 1990s, equity market valuation was a popular topic for investors, financial analysts and academics. Some questioned whether traditional accounting and financial information had lost its value relevance, as stocks traded at multiples of earnings well in excess of historic levels, leading Alan Greenspan to caution against irrational exuberance. This study examines the relation between market valuation and traditional accounting information before, during and after the bubble. We document a decline in the relation between market value and traditional accounting information during the bubble period followed by an increase after the collapse of the market in 2000. We further demonstrate that the quality of earnings followed a similar trend and financial analysts’ forecasts of earnings were more aggressive during the bubble period than they have been since.
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