On April 23rd 2015 the NASDAQ Composite Index, which traditionally lists more technology oriented companies than any other stock market index in the U.S., closed at 5,073 points, which is for the first time higher than the peak that had been reached during the dot-com bubble that burst 15 years ago in March 2000. As a consequence, there is a growing public interest in whether the present growth rates in the technology sector are to be seen as sustainable, or if growth rather appears to be inflated as during the dot-com bubble, which eventually had devastating consequences for the economy. In order to avoid such an economic downturn from happening again, it is crucial to gain an understanding of whether or not a potential overvaluation can be identified in the technology industry. To our knowledge, there is no academic literature dealing with the current potential bubble development in the technology industry yet. Consequently, we explore how the current development compares to that during the dot-com bubble and whether current market valuations give rise to question if valuations are justified by accounting fundamentals. To approach this, we analyze the development of the NASDAQ Composite and compare its relative performance to that of two other major U.S. indexes, namely the S&P 500 and the Dow Jones, over the last 15 years. To test more specifically for a potential bubble development in the technology industry, we focus on examining the relation between market valuation and traditional accounting fundamentals by using a high-tech sample over a fourteen-year timespan from 2000 to 2013. This is done by applying the value relevance model, which allows us to determine the explanatory power of traditional accounting fundamentals for company market values. We find that important financial indicators of the NASDAQ Composite, such as P/E and P/B ratios, are currently much lower than they were during the dot-com bubble, indicating an index that does not appear to be as inflated as it was 15 years ago. However, we also find that the NASDAQ Composite shows significant accelerated growth compared to its peers, especially during the last three years. The NASDAQ Composite can therefore be regarded as heated. In our value relevance analysis, we confirm results of previous researchers that documented an increase in the relation between market values and traditional accounting fundamentals after the dot-com bubble. This indicates that investors might have returned to more rational investment strategies after the burst of the bubble. By extending the model until 2013, we are able to document that the value relevance of accounting fundamentals displays a decreasing trend over the last three years, which is in contrast to the development during the years after the dot-com bubble. This implies that investors potentially acted less rational and might have used more irrational investment strategies during the last three years. In conclusion, it can be resumed that the current development in the technology industry is not yet to be seen as a bubble, or close to a bubble. However, looking forward, if the trading behavior continues to develop more towards irrational behavior, as it might have during the last three years, a situation as during the dot-com bubble, might possibly occur over the next few years. This would be illustrated by a further decrease in value relevance of accounting fundamentals.
|Educations||MSc in International Business, (Graduate Programme) Final Thesis|
|Number of pages||101|