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The Relevance of Accounting Information in a Stock Market Bubble: Evidence from Internet IPOs

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  • Nilabhra Bhattacharya
  • Elizabeth Demers
  • Philip Joos
Abstract
Prior research shows that accounting information is relevant for stock valuation, failure prediction, performance evaluation, optimal contracting, and other decision‐making contexts in relatively stable market settings. By contrast, accounting's role during stock market bubbles such as those involving a revolutionary emerging technology is the subject of considerable debate, and prominent market observers have alleged that outdated and flawed accounting practices contributed to the crash of the Internet‐led high‐tech bubble of the late 1990s. We address the issue of whether accounting data is informative in a stock market bubble by examining its failure prediction ability in the context of Internet IPOs, one of the most egregious and economically significant sectors of the high tech bubble. Our setting of young start‐up firms is one in which there is relatively little room for managerial discretion with respect to accounting accruals; Internet firms' accounting earnings closely approximate operating cash flows. Yet in contrast to widespread criticisms of accounting and its alleged role in fueling the bubble, we find that accounting variables are highly informative for failure prediction; specifically, they are significant in explaining ex post realized Internet IPO failures. Using an existing IPO failure prediction methodology and two alternative definitions of innovative IPOs, we further show that ex ante, out‐of‐sample Internet IPO failure forecasts are associated with economically and statistically significant hedge returns. Our analyses suggest that the traditional financial reporting system could serve as an anchor during speculative bubbles.

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  • Nilabhra Bhattacharya & Elizabeth Demers & Philip Joos, 2010. "The Relevance of Accounting Information in a Stock Market Bubble: Evidence from Internet IPOs," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(3‐4), pages 291-321, April.
    • Handle: RePEc:bla:jbfnac:v:37:y:2010:i:3-4:p:291-321
    DOI: 10.1111/j.1468-5957.2009.02144.x
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    6. Espenlaub, Susanne & Goyal, Abhinav & Mohamed, Abdulkadir, 2020. "The impact of shareholders and creditors rights on IPO performance: An international study," The British Accounting Review, Elsevier, vol. 52(1).
    7. Soenke Sievers & Jan Klobucnik, 2011. "Valuing high technology growth firms," Cologne Graduate School Working Paper Series 02-07, Cologne Graduate School in Management, Economics and Social Sciences.
    8. Ana Simpson, 2010. "Discussion of The Relevance of Accounting Information in a Stock Market Bubble: Evidence from Internet IPOs," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(3‐4), pages 322-331, April.
    9. Waleed Khalid & Kashif Ur Rehman & Muhammad Kashif, 2019. "The Impact of Merger and Acquisition Firms on Stock Market Bubble," Global Regional Review, Humanity Only, vol. 4(1), pages 335-342, March.
    10. Ayesha Liaqat & Mian Sajid Nazir & Iftikhar Ahmad & Hammad Hassan Mirza & Farooq Anwar, 2020. "Do stock price bubbles correlate between China and Pakistan? An inquiry of pre‐ and post‐Chinese investment in Pakistani capital market under China‐Pakistan Economic Corridor regime," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 25(3), pages 323-335, July.
    11. Dai, Shangze & Fan, Fei & Zhang, Keke, 2022. "Creative Destruction and Stock Price Informativeness in Emerging Economies," MPRA Paper 113661, University Library of Munich, Germany.
    12. Cressy, Robert & Farag, Hisham, 2014. "Stairway to heaven or gateway to hell? A competing risks analysis of delistings from Hong Kong's Growth Enterprise Market," International Review of Financial Analysis, Elsevier, vol. 36(C), pages 195-205.
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