The Dot Com Effect: the impact of e-commerce announcements on the market value of firms

The media hype surrounding the growth of electronic commerce has led to considerable firm interest in making the significant investments required to participate in this growing market. However, evidence on the benefits to firms from e-commerce is far from being as unequivocally positive as popular accounts would lead us to believe. In this paper, we explore the following questions: What are the economic returns to firms from engaging in e-commerce? How do the returns to non-net, brick and mortar firms from e-commerce initiatives compare with returns to the new breed of net firms? How do returns from business-to-business e-commerce compare with returns from business-to-consumer e-commerce? How do the returns to e-commerce initiatives involving digital goods compare to initiatives involving tangible goods? We examine these issues using event study methodology and assess the cumulative abnormal returns (CARs) for 305 e-commerce announcements between October and December 1998. The results suggest that e-commerce initiatives do indeed lead to positive CARs for firms. However, the hypothesis drawing on the resource based view of the firm: that the CARs to non-net firms are significantly more than the CAR to net firms is not supported. The CARs associated with business-to-consumer e-commerce announcements are higher than the CARs for business-to-business e-commerce, a result contrary to the hypothesized direction. Further, there is no support for the hypothesis that returns to e-commerce events involving digital goods products are higher than returns to tangible goods. Surprisingly, returns to tangible goods are consistently, though not significantly, larger than to digital goods. The results are robust to the removal of outliers and time windows of varying length between firm announcements and capital