Internet Stock Analysis

Paper Summary:

This paper explains that John. R. M. Hand notes, because the internet was changing the business landscape with such speed, normative financial methods such as earnings and book values are unable to give financial analysts a working window into how internet wealth is created. The author points out that, Hand relates that log-linear regressions were able to yield lower pricing errors for internet stocks better than using regressions of unscaled data and that his methodology is able to reduce pricing errors. The paper hypothesizes that, although Hand's formulas can be used to analyze the geometric growth of a particular market based on intangible assets, straight line linear progression analysis of true earnings and book values still have their place as a base line evaluation of a weakening then falling technology market that we experienced between 2000 LQ and 2001 LQ. Chart.

From the Paper:

"Professor Hand asserts that by using this technique he had proven that the Internet firms' log-transformed market values were neatly linear in both (non-linear) log-transformed book equity and log-transformed net income He further asserts that, when the log-log regression results are translated back into their underlying dollar values, he is convinced that the Internet firms market values are linear and increasing in book equity. He also notes that the market values are concave and increasing (vs decreasing) in positive (vs. Negative) net income."

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