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Master Thesis Irrational Exuberance MASTER THESIS COPENHAGEN BUSINESS SCHOOL Finance & Strategic Management IRRATIONAL EXUBERANCE AN EMPIRICAL ANALYSIS OF MARKET DYNAMICS IN THE CURRENT US TECHNOLOGY SECTOR AUTHORS OF PAPER EMIL DALENG (116741) LAURITZ LONT (92866) NAME OF SUPERVISOR: CHRISTIAN WÜRTZ DATE OF SUBMISSION: 15TH OF MAY, 2019 NUMBER OF PAGES: 120 NUMBER OF CHARACTERS: 272.745 Copenhagen Business School 15.05.2019 ABSTRACT This thesis examines to what extent the contemporary US technology sector could find itself in a new bubble, like the one last seen at the beginning of this millennia. In this process we conceptualize a framework for thinking methodological about financial bubbles and underlying market mechanisms. We find evidence that US asset valuations are defined by a degree of behavioral shortcomings exhibited by irrational investors in the marketplace. It is further suggested that the capital market may have temporarily failed in its role as an efficient allocator of capital, with a reemergence of a growth at all costs mentality visible. We further assert that the US monetary policy, through historically low interest rates, have induced companies to increase leverage, of which the quality of debt is found to be declining, thus the economy is more prone to a market downturn. Based on our findings, we emphasize the need for caution when dealing with the sector, and highlight the likelihood that we are currently in a technology bubble. Copenhagen Business School 15.05.2019 TABLE OF CONTENTS I: INTRODUCTION ................................................................................................... 1 1.1 PROLOGUE ........................................................................................................... 1 1.2 MOVING TOWARDS THE BURST OF THE DOT-COM BUBBLE ................................................ 2 1.3 THE AFTERMATH OF THE BUBBLE BURST ....................................................................... 3 1.4 THE CONTEMPORARY ENVIRONMENT FOR TECH-FIRMS .................................................... 4 1.5 PROBLEM STATEMENT ............................................................................................. 6 II: METHODOLOGY ................................................................................................. 7 2.1 INTRODUCTION ...................................................................................................... 7 2.2 RESEARCH OBJECTIVE AND PURPOSE ........................................................................... 7 2.3 RESEARCH PHILOSOPHY ........................................................................................... 8 2.4 RESEARCH DESIGN AND STRATEGY............................................................................... 8 2.5 PROPOSITIONS AND CONCEPTUAL FRAMEWORK ............................................................ 9 2.6 DELIMITATIONS .................................................................................................... 10 2.7 STRUCTURE ......................................................................................................... 11 III: THEORETICAL FOUNDATIONS .......................................................................... 12 3.1 FINANCIAL BUBBLES .............................................................................................. 12 3.1.1 Defining Financial bubbles ........................................................................ 12 3.1.2 Efficient market hypothesis and bubbles ................................................... 13 3.2 HOW BUBBLES MAY BE CREATED AND ENDURE - BEHAVIORAL FINANCE .............................. 14 3.2.1 Rational Investors ..................................................................................... 14 3.2.2 Irrational Investors.................................................................................... 18 IV: LITERATURE REVIEW ....................................................................................... 21 4.1 INTRODUCTION AND SELECTION OF AREAS OF CONCERN ................................................. 21 4.2 FINANCIAL FUNDAMENTALS & VALUATION ................................................................. 21 4.3 INTANGIBLE ASSETS .............................................................................................. 24 4.4 INVESTOR BEHAVIOR ............................................................................................. 26 4.5 INITIAL PUBLIC OFFERINGS...................................................................................... 28 4.6 VENTURE CAPITAL ................................................................................................ 31 4.7 INTEREST RATES ................................................................................................... 33 4.8 CORPORATE DEBT ................................................................................................ 35 V: DEVELOPMENT OF CONCEPTUAL FRAMEWORK ............................................... 38 VI: DATA SAMPLE ................................................................................................. 45 Copenhagen Business School 15.05.2019 VII: ANALYSIS ....................................................................................................... 55 7.1 PILLAR I: ASSET VALUATIONS & INVESTOR BEHAVIOR ................................................... 56 7.1.1 Neglecting of Financial Metrics ................................................................. 56 7.1.2 Intangible Asset Valuation ........................................................................ 61 7.1.3 Investor Behavior ...................................................................................... 64 7.2 PILLAR II: CAPITAL MARKET MECHANISMS ................................................................. 69 7.2.1 Initial Public Offering mania ..................................................................... 69 7.2.2 Aggressive Venture Capital ....................................................................... 74 7.3 PILLAR III: MONETARY POLICY & CORPORATE LENDING ................................................ 77 7.3.1 Monetary Policy ........................................................................................ 78 7.3.2 Corporate Lending .................................................................................... 81 VIII: DISCUSSION .................................................................................................. 86 8.1 ASSET VALUATIONS & INVESTOR BEHAVIOR ............................................................... 86 8.1.1 Neglecting of Financial Metrics ................................................................. 86 8.1.2 Intangible Asset Valuation ........................................................................ 88 8.1.3 Investor Behavior ...................................................................................... 89 8.1.4 Summary of Pillar I .................................................................................... 91 8.2 CAPITAL MARKET MECHANISMS .............................................................................. 91 8.2.1 Initial Public Offering mania ..................................................................... 91 8.2.2 Aggressive Venture Capital ....................................................................... 93 8.2.3 Summary of Pillar II ................................................................................... 94 8.3 MONETARY POLICY & CORPORATE LENDING ............................................................... 95 8.3.1 Monetary Policy ........................................................................................ 95 8.3.2 Corporate Lending .................................................................................... 96 8.3.4 Summary of Pillar III .................................................................................. 98 IX: LIMITATIONS AND SUGGESTIONS FOR FURTHER RESEARCH ............................ 99 X: CONCLUSION ................................................................................................. 101 XI: REFERENCES .................................................................................................. 103 XII: APPENDICES ................................................................................................. 126 Copenhagen Business School 15.05.2019 OVERVIEW OF TABLES Table 1: List of Hedge Funds utilized in the analysis ........................................................................ 47 Table 2: List of sector codes extracted from Bloomberg ................................................................... 48 Table 3: Example of our Hedge Fund portfolio structure .................................................................. 49 Table 4: Mean first-day return and number of IPOs (1980 – 2018 .................................................... 50 Table 5: Mean first-day returns and number of IPOs segmented by LTM sales (1980 – 2017) ....... 50 Table 6: Number of tech IPOs, median age and percentage profitable (1980 – 2018) ...................... 51 Table 7: IPOs and percentage profitable and median sales, segmented by industry (1980 – 2018) .. 51 Table 8: Profitability of technology related IPOs (1980 – 2018) ...................................................... 52 Table 9: List of Venture Capital data (2006 – 2018) ......................................................................... 52 Table 10: List of Venture Capital data segmented by sector (2006 – 2018) ..................................... 53 Table
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