THE DOT COM EFFECT: THE IMPACT OF E-COMMERCE ANNOUNCEMENTS ON THE MARKET VALUE OF FIRMS

The media hype surrounding the growth of electronic commerce has led to considerable firm interest in making the significant investments required to participate in this growing market. However, the evidence on benefits to firms from e-commerce is far from unequivocally positive, as popular accounts would lead us to believe. In this paper, we explore the following questions: What are the economic returns to firms from engaging in e-commerce? How do the returns to non-net, brick and mortar firms from e-commerce initiatives compare with returns to the new breed of net firms? How do returns from business-to-business e-commerce compare with returns from business-to-consumer e-commerce? We examine these issues using event study methodology and assess the cumulative abnormal returns (CARs) for 305 e-commerce announcements between October and December 1998. The results suggest that e-commerce initiatives announced in this period do indeed lead to positive CARs for firms. However, the hypothesis drawing on the resource-based view of the firm: that the CAR to non-net firms is significantly more than the CAR to net firms is not supported. Further, the CARs associated with business-to-consumer e-commerce announcements are higher than the CARs for business-to-business e-commerce, a result contrary to the hypothesized direction. The results are robust to the removal of outliers and time windows of varying length between firm announcements and capital market adjustments of prices. Most importantly, the magnitudes of CARs (between 3% and 11%) observed in response to e-commerce announcements are considerably larger than those observed for a variety of firm actions in the prior literature. This paper presents the first empirical test of the dot com effect, validating the popular notion that capital markets recognize the transformational potential of e-commerce and expect significant future benefits to firms entering into e-commerce arrangements.