Date of Award

2002

Document Type

Honors Thesis (Open Access)

Department

Colby College. Economics Dept.

Advisor(s)

(unknown)

Abstract

Comprising nearly one-third of the nation's gross domestic product from 1995 to 1999, the growth of the Information Technology industry took a backseat to dot.com mania. Its companies, however, were just as influential in creating the stock market bubble. Characterized by high technology, high research and development, high profits, and high risk, the Information Technology industry had always been attractive to venture capital investors. This study will find that a Telecommunications Deregulation Act passed in 1996, in conjunction with an eight percent capital gains tax cut in 1997, flooded venture capitalists with business plans pertaining to the Information Technology industry. It will also find that this surge in demand, in conjunction with an equally large inflow of capital, led to a significant and dangerous change in venture capital investment behavior. The study will find that venture capitalists forced financing rounds close together allowing for an increase of capital to each investment and a decrease of time to perform proper due diligence. These poorly supervised but highly funded investments were then brought to initial public offering with pre-money valuations reflecting their potential market growth, not their financial status. The problem with these generated growth rates was that they were based on highly speculative information, as many new markets emerged during the late 1990s. This study will show that tbe change in venture capital behavior saturated a market with over valued and poorly modeled businesses, leading to the eventual burst of the stock market bubble.

Keywords

Venture capital, Stocks -- Prices, Stock exchanges

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