BUBBLE CASE STUDY

Question 1

DOTCOM BUBBLE CASE STUDY

PERIOD

Answer 1

1995-2000 MAINLY IN US

Question 2

DOTCOM BUBBLE CASE STUDY
EVENTS

Answer 2

RAPID RISE IN TECH STOCK, ESPECIALLY IN INTERNETBASED COMPANIES OR “DOTCOMS”

Question 3

DOTCOM BUBBLE CASE STUDY
CAUSE

Answer 3

WIDESPREAD BELIEF IN THE INTERNET ECONOMICS POTENTIAL LED TO EXCESSIVE INVESTMENT

Question 4

DOTCOM BUBBLE CASE STUDY
OUTCOMES

Answer 4

Nasdaq Composite peaked in 2000 and lost 80% by 2002, leading to bankruptcies and a severe economic downturn.

Question 5

DOTCOM BUBBLE CASE STUDY

PEOPLE INVOLVED

Answer 5

INVESTOR AND COMPANIES

Question 6

Financial Management Principles Ignored?
Higher returns come with higher risks. During the bubble, investors overlooked risk for potential high returns. Example: VA Linux surged 698% in one day but lost 98% of value in the following year.

Answer 6

Risk-Return Trade-Off

Question 7

Financial Management Principles Ignored:
A dollar today is worth more than a dollar tomorrow. Companies were valued on future potential, not immediate profits. Example: Amazon lost 95% of its stock value by 2001 despite massive growth projections.

Answer 7

Time Value of Money

Question 8

Financial Management Principles Ignored:
Cash flow is more critical than accounting profit. Webvan’s cash flow issues led to its bankruptcy after spending $1.2 billion on infrastructure.

Answer 8

Cash, Not Profit, Is King

Question 9

Financial Management Principles Ignored:
Decisions should focus on additional cash flows, not total. eToys overspent on marketing without generating sufficient incremental returns, leading to bankruptcy.

Answer 9

Incremental Cash Flows

Question 10

Financial Management Principles Ignored:
Profitable industries attract competitors, lowering profits. Pets.com faced excessive competition, leading to its collapse.

Answer 10

Curse of Competitive Markets

Question 11

Financial Management Principles Ignored:
Markets reflect all available info, but during the bubble, stock prices were inflated by speculation. Priceline.com saw a drastic 90% stock decline after the bubble burst.

Answer 11

Efficient Capital Markets

Question 12

Financial Management Principles Ignored:
Conflict of interest between managers and shareholders. Executives focused on short-term gains, leaving shareholders with the losses when the companies collapsed.

Answer 12

The Agency Problem

Question 13

Financial Management Principles Ignored:
Tax strategies influenced financial decisions. Companies deferred recognizing revenues to reduce tax liabilities, which distorted financial statements.

Answer 13

Taxes Bias Business Decisions

Question 14

Financial Management Principles Ignored:
Some risks can be diversified. Many investors didn’t diversify, concentrating on tech stocks, leading to catastrophic losses when the market crashed.

Answer 14

All Risks Are Not Equal

Question 15

Financial Management Principles Ignored:
Ethical practices are key to financial stability. Unethical behaviors like “pump and dump” schemes were common during the bubble, damaging trust in the markets.

Answer 15

Ethical Behavior