Valuation and New Economy Firms

In this paper, I present a framework to evaluate Internet / New Economy businesses. That framework is used to help discuss why valuations were so high at the end of 1999 and why they have declined so precipitously since then. I also discuss the implications of the rise and fall of valuations. I then consider the effects of the large swings in market valuation / sentiment on individual companies. Finally, I speculate on the likely very positive long-term real effects of the Internet / New Economy. * Neubauer Family Professor of Entrepreneurship and Finance, University of Chicago Graduate School of Business, and Research Associate, National Bureau of Economic Research. Address correspondence to Steven Kaplan, University of Chicago Graduate School of Business, 1101 East 58th Street, Chicago, IL 60637 or e-mail at [email protected].