This study explores various drivers of Internet stock prices. This study extends the previous work on Internet stock valuation along two dimensions: (1) the separation of Internet firms into web-related and non-web-related groups. (2) the incorporation of consideration for the effect of Internet shakeout on value drivers identified in this study. The primary findings are as follows.
First, this study finds evidence that contradicts the claims made by some analysts that web traffic metrics are no longer important. The findings show that web-traffic remains value-relevant to Internet stock price for the period Oct 1998 to May 2003.
Second, this study documents evidence against the “common wisdom”, as represented in the business press, that traditional financial statement information has limited usefulness in pricing of Internet stocks. The variable “revenues” is significantly positively associated with the stock price in the pre- and post-shakeout period for all Internet firms.
Third, consistent with prior research on other intangibles-intensive industries, this study finds that, in particular, product development (R&D) appears to be capitalized as assets by investors in their assessment of values of web firms during the testing period, including period subsequent to the industry shakeout in the spring of 2000. This research thus provides preliminary evidence of the value-relevance of R&D expense of the shakeout and maturation of the B2C Internet sector.
Fourth, with respect to the inquiry of the potential effect of difference in web-traffic on the pricing of Internet stock, the empirical results demonstrate the importance of this consideration. The findings indicate that raw web-traffic variable is not value-relevant for non-web firms, while it is value-relevant for web firms.
Finally, the market condition of Internet stocks appears to be influential in explaining the pricing of Internet share. The empirical result shows that the share prices of Internet stocks are higher before the market correction, when holding other variable as controlled.

American Institute of Certified Public Accountants (AICPA),
1994, Improving business reporting-A customer focus: Meeting the information needs of investors and creditors, New York, NY: AICPA.
Amir,E., and B. Lev. 1996. Value-relevance of nonfinancial information: The wireless communications industry, Journal of Accounting & Economics 22:3-30.
Cooper, M., O. Dimitrov, and R. P. Raghavendra. 2001. A rose.com by any other name, Journal of Finance 56(6): 352-369.
Demers, E., and B. Lev. 2001. A Rude Awakening: Internet Shakeout in 2000, Review of Accounting Studies 6: 331-359.
Demers, E., and K. Lewellen. 2003. The marketing role of IPOs:evidence from internet stocks, Journal of Financial Economics 68: 413–437.
Financial Accounting Standards Board (FASB), 2001, Business and financial reporting: Challenges from the new economy, Norwalk, CT: FASB.
Gerstein, M. H., 1999. Sales growth leaders, Marketguide.com Research, 11/16/99.
Hall, B., 1993. New evidence on the impacts of research and development, Working paper, University of California, Berkeley.
Hand, J. R. M., 2000. Underpricing as marketing: the case of Internet IPOs, Working paper, UNC Chapel Hill.
Hand, J. R. M., 2001a. Profits, losses, and the non-linear pricing of Internet stocks, Working paper, UNC Chapel Hill.
Hand, J. R. M., 2001b. The Role of Book Income, Web Traffic, and Supply and Demand in the Pricing of U.S. Internet Stocks, European Finance Review 5: 295–317.
Herring Investor, 03/10/99. Parsing the price-to-sales ratio.
Jorion, P., and E. Talmor. 2000. Value relevance of financial and non-financial information in emerging industries: The changing role of web traffic data, Working Paper, University of California, Irvine.
Lev, B., 2001. Intangibles: Management, measurement, and reporting, Washington, DC: The Brookings Institution.
Lev, B., and T. Sougiannis. 1996. The capitalization, amortization, and value relevance of R&D, Journal of Accounting and Economics 21: 139-158.
Mairesse, J., and M. Sassfnou. 1991. R&D and productivity: A survey of econometric studies at the firm level, NBER Working paper no. 3666.
Meulbroek, L. K., 2000. Does risk matter? Corporate insider transactions in Internet firms, Working paper, Harvard Business School.
Perkins, A. B., and M.C. Perkins. 1999. The Internet Bubble: Inside the Overvalued World of High-Technology Stocks, Harper, New York, NY.
Rajgopal, S., M. Venkatachalam, and S. Kotha. 2000. The relevance of Web Traffic for Stock Prices of Internet Firms, Working Paper, University of Washington.
Rajgopal, S., M. Venkatachalam, and S. Kotha. 2003. The value of network adventages: The case of e-commerce firms, Journal of Accounting Research 41(March): 135-162.
Schultz, P., and M. Zaman. 2000. Do the individuals closest to Internet firms believe they are overvalued? Working paper, University of Notre Dame.
Schwartz, E. S., and M. Moon. 2000. Rational pricing of Internet companies, Financial Analysts Journal 56(3): 62–75.
Trueman, B., M. H. F. Wong, and X. J. Zhang. 2000. The Eyeballs have it: Searching for the Value in Internet Stocks, Journal of Accounting Research.
Trueman, B., M. H. F. Wong, and X. J. Zhang. 2001a. Back to basics: Forecasting the revenues of Internet firms, Review of Accounting Studies 6: 305-329.
Trueman, B., M. H. F. Wong, and X. J. Zhang. 2001b. Anomalous stock returns around Internet firms’ earnings announcements, Journal of Economics and Accounting 33(March): 114-140.
Wallman, S. 1995. The future of accounting and disclosure in an evolving world: The need for dramatic change, Accounting Horizons 9: 81-91.
Wallman, S. 1996. The future of accounting and financial reporting part 2: The colorized approach, Accounting Horizons 10: 138-149.
Wooley, S., 1999. Believe it or net, Virtual Investor, 1/27/99.
Wysocki, P. D., 1999. Cheap talk on the web: The determinants of postings on stock messageBoards, Working paper, University of Michigan Business School.