Rational fads in investor reactions to electronic commerce announcements: An explanation of the Internet bubble

This work offers a theoretical explanation of the electronic commerce stock market bubble of 1999-2000. We propose that the bubble existed because a lack of good information about the potential value of electronic commerce led investors to rely on one another’s private valuations of electronic commerce. Because each investor relied on other investors, positive information early in the period was magnified and propagated through the market, leading to fad-like behavior. We test our theory empirically and find support for our propositions. Implications for theory and practice are discussed.