Week 4 - Griffin, J. M., Harris, J. H., Shu, T., and Topaloglu, S. (2011). Who drove and burst the tech bubble?

Question 1

What is the main idea of this paper?

Answer 1

• The authors examine the roles of individuals and institutions during the tech bubble
• More specifically, they try to find out who bought these tech stocks, who traded around the market peak and whether institutional investors moved in line with the fundamental value of these stocks or not
• During the runup (stock prices rose 5-fold), from 1997 to March, 2000, institutions bought more tech stocks than individuals
• Hedge funds were the most aggressive, but more conservative investment vehicles, such as mutual funds or pension funds, also traded the market movement
• The stock price reversal from March, 2007, was also driven by institutions, however, individual investors (mostly brokerage clients) accelerated buying tech stocks

Question 2

What is the summary of this paper?

Answer 2

-From January 1997 to March 2000, both institutions and individuals actively purchase
technology shares with institutional buying exceeding the sum of direct and indirect (through
mutual funds) individual purchases
- Institutional investors also drive the run-up of individual technology stocks, particularly in
large stocks
- In contrast to the explanation that institutions drove prices higher with a rational but
mistaken belief in future growth opportunities, the authors find that institutions trade in the
direction of clear mispricing in a small sample of equity carve-outs
- Sophisticated investors do not always move against mispricing (central element of market
efficiency).
- Sophisticated investors, like hedge funds, actively purchased technology stocks during the
run-up, but reversed course in March 2000, driving the collapse.
- Individual investors actively bought during both the run-up and particularly the collapse of
technology stocks.
 The results directly challenge the view that sophisticated investors consistently move
against mispricing, a central building block of market efficiency
Overall, the evidence suggests that the most sophisticated market participants actively
purchased technology stocks during the run-up and quickly reversed course in March 2000,
driving the collapse