Value Relevance in Stock Market Highs: the Role of Fundamentals in Technology Company Valuation

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School of Business | Master's thesis
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Purpose of the study During the Dot-Com bubble, several academics reported decreasing relevance of financial and ac-counting information on market valuations, while the trend appeared to have reversed after the bubble burst. With the Internet sector having presided as the focal point, many credited the changes in value relevance to excess investor overoptimism, even ‘irrational exuberance’, and a subsequent shift to more rational behaviour. The recent boom in market valuations has once again called into question rationality, especially around the technology sector. This paper studies the changes in value relevance of financial and accounting information in the US at height of, and after, the Dot-Com bubble. It builds on an established strand of literature in equity valuations, ex-tending the focus to the more recent bull market and firms more likely to be subject to speculation. Specifically, value relevance is examined through four sub-samples, based on technology orientation and age, to make sense of possible irrationality and bubble-like behaviour in the market. Data and methodology The dataset comprises of 41,193 firm-year observations of publicly listed US companies between 1998 and 2016, extracted from the Compustat and CRSP databases. The relationship between market capitalizations and financial and accounting fundamentals is examined with annual OLS regressions, where the explanatory power of the model and its residual errors are used as complementary measures of value relevance for the given year. Furthermore, the regression coefficient estimates are studied with periodical interaction variables to identify the degree to which individual variables have maintained or lost their explanatory power. In order to study the developments within companies more likely to experience speculation, the study focuses on the technology sec-tor. Companies are divided by GICS-codes into technology and non-technology sub-samples, and tech companies are further categorized by age, based on Jay Ritter’s founding date database. Results The results confirm the findings of several academics on low value relevance during the Dot-Com bubble and its significant increase thereafter. Moreover, I find the value relevance has significantly decreased over the past six years, and reverted close to bubble-levels. These results hold for both technology and non-technology companies, and remain consistent regardless of the value relevance measurement. The recent decline in value relevance is further sharpened for technology companies; however equivalent evidence for the newer tech firms comes out weak. Finally, I show the contribution of coefficients remains stable after the Dot-Com crash, which indicates strong evidence towards unaccounted variation gaining importance to equity values.
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Jylhä, Petri
value relevance, capital markets, equity valuation, market rationality, economic bubbles
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