Surging Volatility: An Internet Effect?

This paper analyzes the impact of firms’ adoption of online retailing on their stock price volatility. Given the nascency of the Web, firms moving online are faced with an increased uncertainty in their product markets in addition to fixed setup costs. A simple model illustrates how increased uncertainty in the product markets increases the volatility of the firm’s profits and its stock price. Results consistent with the model are confirmed by an empirical analysis of the volatility of stock prices of traditional firms adopting online-retailing. Both the traditional event study methodology as well as the structural break analysis reveal a distinct surge in volatility of firms’ stock prices around the date of announcement of their online-retailing operations, an effect that is absent in a matched sample of traditional firms. More interestingly, the volatility-surge is absent for the sample of firms that moved online prior to June 1998. Ongoing research examines possible drivers and the implications of these phenomena for investors, firms, and regulatory authorities.