Online Channel: A means to higher market valuation and better revenue prediction?

The online retail sales are expected to reach $191 billion in 2011 from a meager $36 billion in 2001 (Schonfeld 2010). Different business models have emerged with numerous pure-play online players (e.g., Amazon.com) competing with dual-channel (i.e., brick-and-mortar and online channel) firms (e.g., Best Buy and Wal-Mart). Online channel can reduce search costs of buyers (Bakos 1991) and provide additional efficiency, complementarities, customer lock-in, and innovation for sellers (Amit and Zott 2001). An important question is whether the market rewards firms with greater valuation for any particular business model. Anecdotal evidence of certain retailers such as Amazon.com may suggest that pure-play online retailers have greater market valuation, however, there is a lack of robust empirical evidence to support any particular thesis. Previous studies on market valuation of such firms (e.g., Demers and Lev 2001; Trueman, 2000; Subramani and Walden, 2001) were conducted a decade ago when the Internet was in a nascent stage and stocks were overvalued due to excessive speculation . These studies argued online presence resulted in higher market valuation using residual income models in accounting literature (e.g., Ohlson 1995) or event study (e.g., Subramani and Walden, 2001). However, now that the channel competition has moved beyond speculative environment of the early 2000, it is interesting to study the impact of a particular business model on the market valuation.