WAS THERE MARKET EFFICIENCY & INVESTOR RATIONALITY DURING THE
COLLAPSE OF THE INTERNET STOCK BUBBLE IN 2000?
Dr. Nichole M. Castater
College of Business Administration, Clark Atlanta University
Atlanta, Georgia 30314, USA
404-880-8466
ncastater@cau.edu
Dr. Robert Ware III, Ph.D., J.D.
College of Business Administration, Savannah State University
Savannah, Georgia, 31404, USA
912-353-3084
bware@savstate.edu
ABSTRACT
Since the peak of the Dot.com investment boom in 2000, over 4,800 firms with Internet-focused strategies
have either merged or failed, causing one of the largest financial market “bubbles” in history to burst and
plunging the infant cyber industry into disarray. This paper investigates how stock price is affected by
firm internationalization strategy and the intensity of Internet technology used in the firm’s operations.
Preliminary empirical analyses suggest munificence is an important determinant of stock price.
Munificence occurs when there is congruence between internationalization strategies in both
environments – the virtual environment of cyberspace and the physical world. These findings suggest
that investor rationality in trading Internet shares in 2000 - 2001. Given that the strategies implemented
by firms were readily available on the ‘Net and that this information was readily available to investors,
this research suggests that the information was readily assimilated into the market and reflected in greater
stock price increases for firms with strong internationalization strategies. The use of this information to
invest suggests market efficiency and investor rationality.
KEYWORDS:
cyberspace, Internet, investor rationality, internationalization, productivity
INTRODUCTION
The consolidation of the Dot.com industry or bursting of the Dot.com bubble is likely one of the
most significant market events in recent American financial and management history. Much has been
written and speculated regarding the reasons for the consolidation and failure of many fledgling Internet
firms. These reasons include a lack of adherence to tried and true business and financial principles.
Instead, in many cases, Website traffic (Hand, 2001; Demers & Lev, 2001; Trueman, Wong, & Zhang,
2000), the addition of a “dot.com” business name (Lee, 2001; Cooper, Dimitrov, & Rau, 2001),
managerial actions (Rajgopal, Venkatachalam, Kotha, 2002) and cash burn (Bartov, Mohanram,
Seethamraju, 2002; Gollotto & Kim, 2003) determined a firm’s stock price more than other financial and
accounting numbers, namely, earnings (Keating, Lys, & Magee, 2000). Internet investment has also been
documented to behave in a herd-like manner (Hirschey, Richardson, & Scholz, 2000). This, along with
increased insider selling which coincided with “an unprecedented level of lockup expirations,” and new
financial disclosures, have been documented reasons for the Internet bubble burst (Ofek & Richardson,
2003). Whatever the reasons, there are few empirical financial and strategy management studies of the
surviving Dot.com firms. Though this research does not purport to provide the total answer to what
caused Dot.coms to fail, this research does shed some light on how and why investors picked “winners”
and “losers” during a market bubble.
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Rajopal, et.al in their 2002 paper, found that managerial actions are determinants of stock price.
In much this same way, this research seeks to determine whether internationalization decisions, either in
the virtual or physical environments, affect stock price in the same manner. In previous research by Ware
(2004), the researcher finds that virtual and international strategies actually diminish productivity. Ware
(2004) found that the more domestic and focused the strategy, the higher the level of productivity
achieved. This research seeks to determine whether the virtual and international strategies that cause
productivity to increase, will also cause stock prices to increase.
The question presented in this research is whether different internationalization strategies in the
physical environment and cyberspace are associated with increased stock price. In order to explore the
relationship between stock price and the virtual environment of cyberspace, a sample of one hundred
firms with Internet-focused strategies were analyzed. To this end, a literature review, propositions, model
presentation, and discussion of research results and implications follows.
LITERATURE REVIEW
This paper combines several areas of business research in an attempt to understand what existing
research contributes to the understanding of stock price changes based in technology-based
internationalization in unregulated international environments. The following sections cover the literature
on the environment, strategy, finance and accounting performance that is pertinent to the investigation of
Internet-focused firms. Each area of research literature will be discussed in turn.
The Environment
Virtual firms exist and operate in two environments – the physical and the virtual environment of
cyberspace. By functioning in two environments, Internet firms face new challenges and opportunities,
which affect their respective strategies. A firm’s environment has been conceptualized to be a principle
construct for understanding the relationship between firm behavior and performance (Hofer & Schendel,
1978). The structure-conduct-performance paradigm has been the basic model used in industrial
organizational economics (Prescott, 1986). According to the paradigm, firm performance is dependent on
firm conduct, such as investment policies and pricing. Conduct depends on the structure of the industry
(Scherer, 1980). An industry’s structure is defined by its concentration, level of product differentiation,
barriers to entry, growth rate, and other factors. Studies by Bain (1959) and Scherer (1980) suggests that
industry structure affects both conduct and performance. Strategic management scholars use the term
“environment” as a surrogate for industry structure (Prescott, 1986). Likewise, conduct is called
“strategy”. It is common in the strategic management literature to define strategy as a pattern of firm
behavior (Smith & Grimm, 1987; Hambrick, 1983). Porter (1980) collected a comprehensive catalogue
of how firm strategies and performance are affected by environment. These early studies suggested that
different perceived and objective environments will have a moderating effect on the relationship between
a firm’s strategy and its performance (Prescott, 1986).
Strategic management considers the relationships of four constructs, namely: strategy,
environment, organization, and performance (Summer, et al., 1990). Each of these constructs is
multidimentional (Ketchen & Shook, 1996). Thompson (1997) suggests that environments can be
divided into task and general elements. Hence, there is precedent in the strategy management literature
for considering the internationalization environment as being comprised of two dimensions – the virtual
and physical.
The strategic management literature has investigated the effects of regulated environments on
firm performance. Wyckoff (1976) found that regulated environments decreased organizational
flexibility, innovation, and adaptiveness. Mahon & Murray (1981) suggested that focused strategies will
be less important to firm performance in regulated markets than in unregulated markets. Smith & Grimm
(1987) validated this assessment. In a study of the highly regulated U.S. railroad industry, Smith &
Grimm (1987) found that few firms implemented focused strategies. The researchers suggested
regulation reduced the benefits of implementing a focused strategy, and curtailed incentives to implement
strategies most aligned with the regulated environment.
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Internationalization Theory
As well as being a virtual environment, cyberspace is international by its very nature. The
international nature of cyberspace suggests the literature about internationalization may provide insights
on firms with Internet-focused strategies. Internationalization process models are the focus of the
literature. Internationalization process models define the stages and identify the determinants of firm
internationalization. Moen (2002) proposes classifying internationalization literature into two, highly
related groups – innovation process models and developmental process models, like the Uppsula model.
In innovation process models, internationalization is considered an innovation of the firm.
Developmental process models focus on the different stages of knowledge and commitment firms
experience during their international development. In the Uppsala model, firms use acquisition,
integration, and knowledge about a foreign environment in formulating and implementing
internationalization strategies. The level of knowledge about a foreign environment suggests a level of
market commitment equal to the level of knowledge. As the level of knowledge increases in the firm, the
level of commitment increases. Firm knowledge is acquired through firm internationalization (Johanson
& Vahlne, 1990; Yeoh, 2000), the experience of firm management (Harveston, Kedia & Davis, 2000),
management’s mindset (Harveston, et. al, 2000), networking (Yeoh, 2000), and Internet usage (Yeoh,
2000).
Empirical evidence supports the basic tenets of the Uppsala model. Researchers have validated
the models basic premises over twenty years and in the context of many countries. Carlsson (1966) first
suggested elements of the Uppsala model using a sample of Swedish firms. American researchers
investigating Wisconsin manufacturing firms found support for the model (Bilkey & Tesar, 1977; Bilkey,
1978). Hawaiian exporters (Hook & Czinkota, 1988), Turkish exporters (Karafakioglu, 1986), and a
study of Australian firms (Barrett, 1986) all found support for the basic tenets of the Uppsala model.
Degree of Internationalization
The investigation of internationalization has given rise to the study of quantifying the degree of
internationalization (DOI) of the firm. Common measures of DOI include: foreign sales as a percentage
of total sales (Daniels & Bracker, 1989; Geringer, Beamish & daCosta, 1989), the intensity of research
and development (Caves, 1982), advertising intensity (Caves, 1982; Capon, Farley & Hoeing, 1990),
export as a percentage of total sales (Sullivan & Bauerschmidt, 1989), foreign assets as a percentage of
total assets (Daniels & Bracker, 1989), the number of foreign subsidiaries (Stopford & Wells, 1972), and
lastly, foreign profits as a percentage of total profits (Eppink & Van Rhijin, 1988). DOI measures are
typically investigated using the following financial performance variables – return on assets, beta, riskadjusted returns, sales growth, return on sales, return on equity, net profits, total risk, and leverage.
Though the results of these studies have been varied (Sullivan, 1994), in general they support the
hypotheses that the greater the degree of internationalization, the better the financial performance of the
firm. To date, no studies have investigated the degree of internationalization and financial performance
of firms with Internet-focused strategies.
Another stream of research has investigated the factors that encourage firms with Internet-focused
strategies to internationalize. Kotha, Rindova & Rothaemel (2001) found a mix of virtual and physical
factors significantly determined the frequency of Website internationalization. The determinants that
significantly predict the frequency of Website internationalization included intangible assets, such as
Website traffic and reputation, and tangible assets, like cooperation and competitiveness (Kotha, et al.,
2001). Harveston, et al. (2000) managers of born global firms tend to have a geocentric mindset and
previous international experience. Neither study considered the dual environments in which firms with
Internet-focused strategies operate nor did the analyses consider firm performance. Kotha, et al. (2001),
Harveston, et al. (2000) and most of the born global literature examine firm formation with the aim of
identifying the predictors and determinants of internationalization. The literature has yet to examine the
link between firm performance and the dual environments in which firms with Internet-focused strategic
compete.
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Stock Price Performance
Does the instant accessibility of global linkages equate to higher stock prices for Internet firms?
This is one question the Internet technologies (IT) literature addresses by investigating the effects of
implementing Internet-focused strategies on stock price.
Two stunning determinants of Internet firm stock prices appear to be web traffic and “cash burn.”
Hand (2001), Demers and Lev (2001), Trueman, Wong and Zhang (2000) found that the higher the level
of web traffic, the more positive the effect on stock price. Cash burn, or the propensity of Internet firms
to spend money on multiple endeavors, appears also to have a positive effect on stock price. Trueman, et
al. (2000), Bartov, et al. (2002), and Gollotto & Kim (2003) find this to be the case. Applied to this
research, virtual and international strategies require more cash burn. Therefore, the more virtual and
international an Internet firm, the more likely its stock price will increase.
Another component to Internet firm stock prices appears to be the fact that the market knows they
are virtual. Lee (2001) and Cooper, et al. (2001) find that when a firm’s name changes to a “.com” name,
stock price increases. It appears, according to these studies, that even the least virtual of the “.com” firms
experiences positive and significant stock price movement after a name change. These findings seem to
support the previously stated sentiment that the more virtual an Internet firm, the more likely its stock
price will increase.
Investor rationality in purchasing Internet stocks appears to be linked to the availability of firm
information. (Keating, et al., 2000) Hirschey, et al. (2000) and Ofek, et al. (2002) found that investors
were irrational as investors did not used publicly available information in deciding which Internet stocks
to purchase. However, Hand (2001) found investors rationally used firm information, when web traffic
was “immaterial.” In a discussion of Hand (2001), Talmor (2001) concluded that the conclusion of
market rationality cannot necessarily be made given the results, and that Hand’s results could be
attributed to a “spillover effect.” Even the findings of Keating, et al. (2000) have been disputed by
Lewellen (2000), which stated that even though Keating, et al. found the stock price decline in 2000 could
be partly attributed to 1999 annual report data, the results are unlikely to repeat, and hence are not
applicable to other firms or time periods.
Given the set of assertions just presented, it appears that the literature on Internet firms and stock
price is still undecided, at best, concerning the determinants of Internet firm stock price. This research
will shed light on investor rationality by showing which strategies, whether domestic, international,
virtual, or balances of all of these, are the strategies that lead to stock price growth. If munificence, or the
congruence of strategies, actually leads to stock price growth, this will help confirm the presence of
rationality in Internet firm investment.
HYPOTHESES
According to the literature, several quantifications of management strategy are expected to
increase firm performance. The quantifications of management include munificence, internationalization,
and focus. Rational investors will seek out and prefer to invest in firms with sound management
strategies and these firms should experience greater share price gains than firms that do not implement
management strategies known to be associated with increased firm performance.
H1a: Munificence increases firm performance and hence firm stock price performance.
[from SM literature]
H1b: Internationalization increases firm performance and hence firm stock price
performance. [from DOI and IB literature]
H1c: Focus increases firm performance and hence firm stock price performance.
[from SM literature]
A central tenet of strategic management is that firms must maintain a proper alignment with their
environments. Specifically, the strategic focus of firms must align with the environment or environments
in which the firms operate. Mahon & Murray (1980) argue that in chaotic environments, firms must play
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particular attention to focus resources and strategies on specific strategic areas for optimum performance.
Alignment is important for two reasons – (1) because firms are dependent upon their environments for
resources (Pfeffer & Salancik, 1978); and (2) firms can manage this dependency by developing,
implementing, and maintaining strategies that fit the environments in which they must operate (Hofer &
Schendel, 1978).
H2:
Firms that utilize higher levels of Internet technology in their business operations
and strategies will have higher changes in stock price than firms that utilize
lower levels of Internet technologies.
The exponential growth the Internet experienced during the late 1990’s can be argued to be a
chaotic and unregulated environment. International theory suggests that internationalization positively
impacts firm performance. It is expected that firms with Internet-focused strategies that implement
internationalization strategies in tandem and that are focused on internationalizing in cyberspace and in
the physical environment will be more productive than firms with unfocused, domestic strategies.
SAMPLE
The sample is comprised of one hundred firms representing 977 internationalizations to forty-four
countries. 267 of the internationalizations occurred in cyberspace. Of the one hundred firms, stock price
changes were available for eighty-six of the firms in the original sample. Two published indices of
Internet firms were used to define the sample of this research. From 1998-2002, USA Today published an
index of Internet firms listed on the NYSE and NASDAQ. To supplement this listing, an index of fortysix Internet firms was obtained from AMEX (the American Stock Exchange). In total, 171 Internet firms
were identified through these lists. The resulting catalog of firms was reviewed to remove overlap, as over
thirty firms were listed in both indices. Three firms were removed from consideration because they were
not American. Removal of redundant and non-American firms reduced the total sample to one hundred
and one firms.
All data in the study were as of 2001. Data sources included SEC 10-K Forms, company annual
reports, Yahoo! Finance1, REUTERS2, company Websites, Mergent’s Industrial Manual (2003), and
Mergent’s OTC Industrial Manual (2003, 2002). Given the speculative nature of the Dot.com bubble and
the short life span of many Internet start-ups, the use of firms whose shares traded on major exchanges
increases the reliability of the financial and other data used in this analysis. All stock price data is
adjusted for outstanding shares and for the annual increase of the respective stock markets on which the
shares were traded.
Since the 2001, the year for which all data was collected, only one company, Checkpoint Systems,
of the one hundred and one firms in the sample were either bought, shutdown, or merged. The acquiring
firm is a member of this research’s sample.
VARIABLES
The dependent variable in this study is stock price defined as the change annual change in share
price from 2000 to 2001 adjusted for stock splits, warrants, and new share issues (STKPRC). STKPRC
was calculated by dividing the firm’s 2000 average stock price by 2001 stock price.
The independent variables in this research are a count of Website internationalizations
(NUMWEB), a count of foreign direct investments made by the firm (NUMFDI), VIRTUAL, STRAT,
MUNIFN, PROEMP, and DOTCOM. NUMFDI and NUMWEB are counts of the number of
internationalizations in two environments. NUMFDI and NUMWEB represent firm internationalization
1
2
www.yahoo.finance.com
www.reuters.com
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performance. Cluster analysis was applied to NUMFDI and NUMWEB to identify the type of
internationalization strategy implemented by the firm.
Table 1: Research Variables, their Definition, and Sources
Measures
Host Country
Web Pages
Host Country
FDI’s
Variables
NUMWEB
NUMFDI
Firm X Country
Number of
Employees
Revenues
LOGEMP
Firm
LOGREV
Firm
Employee
Productivity
Environment
PROEMP
Firm
VIRTUAL
Firm
Firm Strategic
Posture
Munificence
STRAT
Firm
MUNIFN
Firm
Change in Stock
Price
STKPRC
Firm
10.
Company
Founding
FOUND
Firm
11.
12.
Industry
Firm Name
INDUS
DOTCOM
Firm
Firm
1.
2.
3.
4.
5.
6.
7.
8.
9.
Dimension(s)
Firm X Country
Collection Criteria
To qualify, the Web page had to be in local
language with local links and content
Physical location or FDI in Country; from
Form 10-K Reports, Annual Reports,
Websites
Count of employees reported by firm annual
reports, Yahoo! Finance, REUTERS
Revenues for 2001 fiscal year reported by
annual reports, Mergent’s Industrial Manual
(2003) and OTC Industrial Manual (2003,
2002)
LOGREV ÷ LOGEMP
Degree of adoption of Internet technologies
in firm’s business operations
Groups of strategic posture identified using
cluster analysis.
Harmony between Website and FDI
strategies
Annual change in stock price adjusted for
new issues and for the relative annual
change in the stock market on which each
respective share traded.
Year firm was started; from Form 10-K
Reports, Annual Reports or company
Websites
Service v. Manufacturing v. Finance
Whether “.com” is used in the firm name.
The table above provides sourcing and other details of the data used for the variables in this research.
The environment variable, VIRTUAL, measured the extent of Internet dependence of the firm.
Assessing the exact level of a firm’s Internet use was difficult to quantify with public archival data – the
only source available for this study. Firms with Internet-focused strategies cover the spectrum of Internet
dependence from being pure Internet plays, such as Yahoo!, to firms that conducted only some aspect of
their affairs via the Internet, Barnesandnoble.com for example.
VIRTUAL, was scored on a four-point scale. The firms in the sample were rated on whether the
Internet was used for advertising or marketing, sales, customer service, and distribution. Firms were
given a “0” representing an advertising or marketing presence. Since all firms in the sample had
Websites, all firms rated at least a “0”. A “1” rating was given if the firm also sold products via the
Internet. “2” represented firms that provided customer service, and “3” represented distributed products
via the Internet.
Two strategy variables were used in the analysis. The first strategy variable was STRAT; the
firm’s internationalization strategy. STRAT represented the strategy used by the firm to internationalize
in cyberspace and in the physical environment. The cluster groups that comprise STRAT were labeled
and coded “1” for Cluster 1; “2” for Cluster 2; “3” for Cluster 3; “4” for Cluster 4; “5” for Cluster 5; “6”
for Cluster 6; and “7” for Cluster 7.
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Munificence (MUNIFN) was the second strategy variable included in the regression. MUNIFN,
a Boolean variable, measured the munificence between cyberspace and physical world
internationalization strategies. Munificence is the agreement of the two strategies in the two
environments. Firms that implemented focused strategies in both cyberspace and in the physical
environment were coded “1”. Mixed strategies, where the firm pursued a domestic strategy in one
environment and an international strategy in the other environment, were not concordant and, thus, were
coded “0”.
Three control variables were used and accounted for the type of industry, firm size, and the firm’s
age. Since, the sample is a mix of manufacturers, finance, and service firms, the Boolean control variable
Industry (INDUS) was used to distinguish between the three types. INDUS was coded “0” for service
firms, “1” for manufacturers, and “2” for financial firms. The firm’s founding year (FOUND) was seen to
be important given the Internet’s relative newness. FOUND was used to normalize differences in
opportunity time between firms of different ages. Firm size (LOGREV) was controlled by using the log
of each firm’s 2001 revenues.
DOTCOM was a variable inspired by Cooper, et al. (2001). DOTCOM was a Boolean variable
coded “0” for firm names that did not include a “.com” suffix and “1” for those that did. PROEMP was
calculated by taking the log of the firm’s 2001 revenue divided by the log of a count of the firm’s 2001
employees.
ANALYSIS
The objectives of this analysis are to identify strategies firms use to internationalize in two
environments, and to determine if the strategic posture of firms with Internet-focused strategies is related
to change in stock price. Collapsing internationalizations in two environments into one dimension will
provide a measure of firm internationalization that more accurately reflects today’s business environment.
Given the mutlidimensionality presented by considering internationalizing in two environments, cluster
analysis is an appropriate method for distinguishing common profiles with distinct characteristics among
distinct variables (Ketchen & Shook, 1996). The purpose of cluster analysis is to group observations such
that each cluster is as homogeneous as possible with respect to the clustering variables, but is also
significantly different from other cluster groupings. According to Ketchen & Shook (1996), “cluster
analysis permits the inclusion of multiple variables as sources of configuration definition…” and “that
[the] configurations represent a way to meaningfully capture the complexity of organizational reality.”
Today’s business reality is that firms can internationalize in either cyberspace, via FDI, or both. In this
study, cluster analysis was used to identify joint physical world and cyberspace internationalization
strategies, derived from combinations of NUMFDI and NUMWEB.
Cluster analysis is a heuristic technique and, therefore, requires establishing the reliability and
external validity of the cluster solution. Ketchen & Shook (1996) recommends application of deductive
reasoning in selecting variables with solid theoretical foundations. A count of internationalizations is a
long established measure of internationalization performance. Kotha, et al. (2001) used a count of
Website internationalizations to define some determinants of cyberspace internationalization. Moen &
Servais (1997) used counts of countries to argue that some so called “born global” firms may actually
internationalize gradually. The international business literature has measured DOI using non-financial
measures such as firm growth quantified as counts of countries, offices, products sold, personnel or other
quantifiable physical assets. Davidson (1980) used counts to illustrate the FDI patterns of American
firms. Given the strong theoretical and empirical foundation of count variables in internationalization
studies, NUMFDI and NUMWEB meet Ketchen & Shook’s (1996) standard.
Ketchen & Shook (1996) recommends splitting the sample in two and reserving one subs-sample
for reliability testing. This cross-validation procedure is also recommended by McIntyre & Blashfield
(1980) for establishing cluster solution reliability. In this study, the sample of one hundred and one firms
was split into sub-samples of fifty and fifty-one firms. Assignment to the two sub-samples was purely
random, except that care was taken to have equal representation, by industry, in each sample.
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One sub-sample was selected and subjected to cluster analysis. Several clustering techniques and
cluster iterations were used to show reliability of the cluster memberships (Ketchen & Shook, 1996). To
this end, several hierarchal clustering linkage methods were used, including average, single, complete,
centroid, Ward’s, and McQuitty’s. Different distance measures were used in conjunction with the six
linkage methods, and included Euclidean, Pearson, and Manhattan measures of distance. Hierarchical
clustering methods do not require a priori knowledge of the number of clusters. Since the various
hierarchical methods differ in how intercluster distances are calculated, multiple methods are used to
determine if a common pattern of cluster solutions exists across the methods.
With the strategy clusters identified, labeled, and tested for reliability and validity, a hierarchical
moderated regression was used to test for the main effects between environment which is cyberspace in
this research, strategy, the firm’s cluster membership, and firm internationalization performance. In
hierarchical moderated regression, the predictor, independent, and control variables are initially specified
(Cohen & Cohen, 1983).
The following equation modeled and tested the relationships between firm stock price
performance and firm internationalization strategy:
YΔSP = F0 + F1X1 + F2X2 + F3X3 + F4X4 + F5X5 + C1 + C2 + C3 + 
EQ 1
Where YWEB is the count of Website internationalizations (NUMWEB) for each firm, F0 is the
intercept, X1 is the firm’s internationalization strategy (STRAT) as defined by its cluster membership, X 2
measures the munificence (MUNIFN) between cyberspace and physical world internationalization
strategies, X3 represents the degree to which the firm uses Internet dependent strategies in its operations
(VIRTUAL), X4 represents whether firm stock price was affected by branding (DOTCOM), and X 5
represents the firm’s employee productivity level (PROEMP).
C1 represented the type of industry (INDUS) in which the firm operates. INDUS was coded “0”
for service firms, “1” for manufacturers, and “2” for financial organizations. C3 is the founding date
(FOUND) of the firm. C3 is the log of firm 2001 revenues, (LOGREV).
The regression results were then explored on a cluster-by-cluster basis to determine which
internationalization strategies were the most productive. This was accomplished by using difference of
means tests to determine whether internationalization via cyberspace increased firm stock price. Onetailed tests were used because all comparisons were testing for deviations in a particular direction from μ.
One-sided tests are best in cases where the alternative hypothesis is not testing for equality, but for a
difference. All difference of means tests in this study checked for differences in one direction, the
purpose of which is to determine if the internationalization or the virtual intensity of the firm are
associated with greater than or lesser than a mean value.
RESULTS
A correlation matrix for the dataset is provided in Table 3, and includes Pearson correlations and
-values. Multicollinearity (Ketchen & Shook, 1996) was nonexistent in the cluster analysis given the
low correlation between NUMWEB and NUMFDI (σ = 0.272).
Graphs of RS, RMSSTD, SPR, for the various clustering techniques, and a scree plot of the
eigenvalues of the factors used in this study, suggested a five, six or seven cluster solution. After
evaluating the cluster solutions of the average, single, complete, centroid, Ward’s, and McQuitty’s
techniques, Ward’s method was preferred because its clustering solutions were found to be more reliable
and valid.
With the clustering technique chosen, the number of cluster groupings was decided. The Ward’s
method cluster solutions for five, six and seven clusters were examined. The modified Perlmutter schema
suggests a cluster solution of five or greater. The highest sum-of-squares for each cluster solution ranged
from 1,268 to 665 to 278, for five, six and seven cluster solutions, respectively. Given the aim of cluster
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analysis is minimize within-cluster sums of squares and maximize between-cluster sums of squares, the
increased homogeneity of the six and seven cluster solutions was of interest.
The hierarchical analysis is therefore validated. With the hierarchical analysis validated, the
clusters were named Cluster 1 – Domestic; Cluster 2 – Multinational; Cluster 3 – International; Cluster 4
– Global; Cluster 5 – Balanced; Cluster 6 – Virtual; and Cluster 7 – PreVirtual.
Table 2: Correlation Matrix
LOGREV PROEMP
FOUND NUMWEB NUMFDI INDUS VIRTUAL MUNIFN ClusW7M
PROEMP
-0.120
0.231
FOUND
-0.246
0.013
0.308
0.002
NUMWEB
0.124
0.215
-0.092
0.361
-0.172
0.086
NUMFDI
0.186
0.063
-0.298
0.002
-0.341
0.000
0.272
0.006
INDUS
0.076
0.452
0.097
0.335
-0.262
0.008
-0.082
0.412
0.314
0.001
VIRTUAL -0.085
0.397
-0.086
0.393
0.121
0.228
0.276
0.005
-0.161
0.109
-0.450
0.000
MUNIFN
0.020
0.844
0.126
0.210
0.092
0.360
0.253
0.011
-0.252
0.011
-0.219
0.028
0.333
0.001
ClusW7M
0.122
0.223
-0.300
0.002
-0.352
0.000
0.078
0.437
0.680
0.000
0.333
0.001
-0.294
0.003
MODW7M -0.026
0.800
-0.179
0.073
-0.135
0.179
0.390
0.000
0.286
0.004
-0.182
0.068
0.710
0.000
-0.494
0.000
0.076
0.449
0.279
0.005
With the strategic clusters identified, strategic posture was regressed against internationalization
performance. The correlations between the predictor and criterion variables were low. Thus, moderating
effects were not adversely affected by mutlicollinearity. If there was a high correlation between two
measures, then it would be inappropriate to include both variables in the same liner equation as
multicollinearity would surpass the acceptable threshold for variance inflation factors (VIF > 10.0) and
violate the assumptions of the general linear model (Lomax, 1992). The Variable inflation Factors (VIFs)
for the regressions were well below the threshold heuristic of 10.0, evidence that multicolinearity was not
a problem in the regression analyses. Anderson-Darling normality, skewness, and kurtosis tests were also
performed. These descriptive measures were found to be within acceptable norms.
Hypothesis 1a was supported. Regression Model 1 demonstrates that munificence of firm
strategy (MUNIFN) has significant power in predicting firm stock price movement. The predictor
variable, MUNIFN, was found to be a significant factor in predicting STKPRC with ρ = 0.010.
Agreement between firm strategy in both physical and virtual environments positively influenced stock
price. All other predictor variables and control variables were not found to be significant in predicting
STKPRC.
239
Hypothesis 1b was supported. Difference of means tests showed significant differences in the
average change of firm stock price between firms that implemented highly international strategies versus
firms with purely domestic strategies (Multinational > Balanced and Balanced > Virtual, both with a 99%
CI). This finding suggests that investors had a preference for firms with physical internationalizations
(FDI’s) and discounted firms that internationalized via cyberspace.
Hypothesis 1c was supported. Internationalization can be viewed as a strategic focus and hence
internationalizing on the Web could be seen as a continuation of internationalization strategy. Difference
of means tests between firm strategies showed that investors significantly favored physically
internationalized firms over domestically focused firms (Multinational > Balanced with a 99% CI).
Hypothesis 2 was not supported. The regression showed no significant relation between
VIRTUAL and STKPRC. VIRTUAL was not found to be a significant factor in predicting STKPRC with
ρ = 0.183.
Table 3: Hierarchical Moderated Regression Analysisfor Internationalization Performance
Model 1
Dependent Variable:
STKPRC

Constant
18.36
Model 2

Model 3
Model 4


38.77
47.38
78.78
-0.185
-0.190
-0.141
VIRTUAL
0.255
0.267
0.261
MUNIFN
-1.178
Strategy Variables:
STRAT
Literature Variables:
DOTCOM
**
-1.223
0.389
PROEMP
-1.247
**
-0.496
0.714
Control Variables:
INDUS
FOUND
LOGREV
Statistics:
Adjusted R2
R2
F
Df
One-tailed test with:
**
**
***
-0.006
-0.407
-0.142
-0.017
-0.307
-0.040
-0.021
-0.308
-0.005
-0.038
-0.183
-0.176
0.0%
--0.78
86
  0.015
  0.001
3.9%
+ 0.79
1.57
86
3.2%
- 0.7
1.41
86
4.7%
+ 1.5
1.52
86
Changes in stock price varied significantly across the seven strategic clusters. In general, firms
with Internet-focused strategies that internationalized realized significantly greater increases in stock
price than firms with Domestic strategies. When firms internationalized in roughly equal measure in both
environments, i.e., implemented a Balanced internationalization strategy, the changes in stock price of
these firms were significantly greater than firms with Domestic strategies. Lastly, changes in stock price
appear to favor firms with strong FDI performance as opposed to cyberspace internationalizations.
240
DISCUSSION
The primary finding of this research is that the change in stock price, of firms with Internetfocused strategies, rose as the degree of internationalization increased. This research reinforces previous
research in this area on cash burn. (Bartov, et al. 2002) A higher degree of internationalization
corresponds with higher investment, and hence higher stock price.
A second finding of this study hints at a form of market rationality by the Internet firm investor.
Since the Internet is an international medium, investors could have perceived that firms with highly
international strategies and operations could take the most advantage of the Internet. The results confirm
this, because firms with high degrees of international physical operations, no matter how extensive their
virtual presence, experienced the highest changes in stock price in response to virtual strategies. This
corresponds with the literature mentioned earlier concerning Dot.com name changes. However, market
irrationality can be argued in that stock price should rise with the more productive firms. Domestic firms,
which have more focused strategies, were found to be more productive in Ware (2004), but it was these
very same companies whose stock prices changed the least. This corresponds with other literature which
finds that earnings and its components are not used to determine stock price in virtual firms. (Rajopal, et
al., 2002) And in the case where these financial variables are compared with other non-financial variables,
the non-financial variables have more influence over stock price.
The third finding is that the degree to which IT strategies are implemented is not significantly
related to changes in firm stock price. This research suggests that Internet technology intensity was less
highly valued by investors than internationalization performance in the physical environment.
The functional nature of the Internet may be a factor in affecting the relationship between change
in stock price and internationalization performance of firms with Internet-focused strategies. The factor
to be considered is the incidental viewing issue identified in Kobrin (2001) and in the landmark case,
Zippo Manufacturing Corp. v. Zippo Dot Com, Inc., 952 F. Supp. 1119, (W.D.Pa.1997). Zippo was an
Internet domain name dispute between the manufacturer of “Zippo” lighters and a California-based
Internet news service, Zippo Dot Com. In its decision, the court observed that the very nature of the
Internet allowed nearly any user anywhere to view any posted Webpage irrespective of whether the
Webpage in question is specifically directed toward specific users. This effect, called “incidental
viewing” may decrease the need to and the benefits of internationalizing Webpages. Firms with Internetfocused strategies must realize their pages can be viewed by all Internet users, thus making any page
internationally available. This leaves the firm with the option of internationalizing Webpages, at a cost,
including a loss in productivity (Ware, 2004) or adopting a less aggressive internationalization strategy by
simply posting firm, product or service information on a “domestic” Website. Though the Website
appears to be domestic in its intent, contents, and focus, the fact is that the Website to posted in an
international environment. In effect, the Website is an international billboard, with the potential intent of
the firm to passively internationalize by posting information in an international environment. Once the
information is posted, it is up to firm to decide whether to honor international sales. Incidental viewing
may decrease the relative importance of internationalizing via cyberspace and may further cloud the
relation between productivity and internationalization. Incidental viewing also clouds the differences of
what is meant by internationalizing in cyberspace.
Is internationalizing in cyberspace simply having a presence on the WWW? Or does cyberspace
internationalization mean increasing the internationality of the Website through host country
customization in terms of language, format, look and feel, contents, functionality, and compliance with
host country laws and customs? Are so called international “top-level” domains, such as, ‘.org’, ‘.com’,
‘.net’, ‘.gov’, and ‘.edu’, more international than country-level domains, such as ‘.us’, ‘.kz’, ‘.be’, or
‘.jp’? If there is a quantitative difference between domains, then should evaluation of internationalization
performance consider the strategic choice of internationalizing via top-level versus country-level
domains? Finally, it is possible that domain types are relatively less important than a quantitative
appraisal of Website performance. Some measures commonly available are Website traffic and sales.
241
The inclusion of Website traffic could provide another measurement of cyberspace internationalization
intensity.
The sample and the cluster centroids of the groups support this supposition. The Domestic cluster
averaged less than one Website and less than three FDI’s. Domestic firms use only one Website in their
Internet strategy. This single presence is likely more significant to the firm’s international development
than its initial FDI’s. The data supports these assertions. Graph #1 shows a productivity benefit to
having a Website. The Website productivity gain is quickly lost as the firm continues to internationalize
in cyberspace. Productivity starts to increase sharply after the third or fourth internationalization, peaks
around ten internationalizations, and then steadily declines. Incidental viewing is one explanation of the
initial benefit of having a presence on the WWW. Incidental viewing allows the Website to be viewed all
Internet users, making the page instantly international. Firms with Domestic strategies may perceive the
returns to internationalizing their Website as being low, either due to perceive or actual increased IT costs
or due to perceived lower rates of attracting Internet users through customization.
CONCLUSION
The Internet is an environment separate and unique from the physical environment most familiar
to firms. Likely the biggest difference between the cyberspace and the physical environment is not the
fact that the Internet is a virtual environment, it is the fact that the Internet is an international
environment. In the physical world, firms have the ability to choose which host country jurisdictions they
will avail themselves. Firms can choose, to an extent, the degree to which they are exposed to the
physical international environment. As a result, firms in the physical world can harness domestic
strategies perfectly suited for and limited to the domestic physical environment in which the asset is
geographically located. Unfortunately, it appears firms have fewer choices in the virtual environment of
the Internet. Once a presence is established on the Internet, a firm is operating in an international
environment, whether its strategy is internationally focused or not.
If a firm does opt for an international strategy, the costs and benefits to the firm are linked to the
environment in which the firm internationalizes. Internationalizations in the physical environment, i.e.,
FDIs, appear to have a positive effect on firm stock price. Financial markets may recognize the benefits
of internationalization enjoyed by firms with Internet-focused strategies. On 21 December 2003, eBay
announced it was opening a Chinese language auction site targeted at the Hong Kong market with prices
in Hong Kong dollars.3 This initiative was a major international expansion for eBay. The day eBay
announced the opening of this new Website internationalization, the stock increased 2.2%4 compared to
an increase in the NASDQ index of 0.3%5.
This research is based on the survivors of the Dot.com consolidation. A major concern is
survivorship bias. (Agarwal & Naik, 2000; Elton, Gruber, & Blake, 1996) Survivorship bias results in an
overestimation of past returns and leads investors to be overly optimistic in predictions of future returns.
From 1999 through 2002, the worldwide Internet industry has faced sharp contraction and consolidation.
Actual numbers reflecting the overall level of consolidation are most difficult to find, however, the
information available in the United States, the country with the largest Internet industry and the country
that has suffered the most industrial change, is telling. At least three American Websites are devoted to
tracking structural changes in the Dot.com industry – Webmergers.com, Dot-Comdeathwatch.com, and
Downside.com.
3
http://investor.ebay.com/releases.cfm?year=2003.
Yahoo! Finance, http://finance.yahoo.com.
5
Ibid.
4
242
Table 4: Worldwide Internet Mergers, Acquisitions and Shutdowns6
Internet-related Mergers
Number of Mergers
Internet Failures
1998
1999
2000
2001
2002
137
465
910
1,289
1,085


224
537
170
9317 Internet companies have closed since January 2000 with over 58%8 of the closings occurring
in 2001. The rate of industry consolidation, as reflected in the merger and acquisition activities, has
increased. The United States accounted for 92% and 96% of all merger activity in 1998 and 1999,
respectively.9
The sample is comprised of Dot.com survivors. Therefore no inferences can be made between
this sample and non-survivors. It is possible that surviving and non-surviving firms implemented
different internationalization strategies and realized different productivity levels. It is also possible the
firms in the sample survived the Dot.com bubble is because they implemented international strategies.
Future studies should investigate the differences among these two groups.
This research did not investigate how or why some firm’s with Internet-focused achieve success
when limiting their operations to domestic strategies. Future studies should investigate under what
conditions firm’s with Internet-focused strategies identify, exploit, and protect business domestic Internet
strategies. Several factors, such as the geographic concentration of the Internet community to which the
firms services, economics, financial constraints, available resources, and trade barriers, may constrain or
encourage the firm to the self-limit its horizons. The legal concept of jurisdiction is one barrier that is
well documented and understood to significantly impact operating environment of firm’s conducting
business on the Internet. Yet, the legal aspect of cyberspace has not been studied in the strategy
management literature.
During the Internet bubble, pundits claimed that cyberspace was the wave of future.10 This was
true even though the manner in which firms with Internet-focused strategies would earn a profit or be
financially viable long-term.11 A strict interpretation of the result of this analysis is that employee
productivity increases as the virtual nature of the firm and the degree of internationalization of the firm
increases. This paper suggests that, in general, firms with Internet-focused strategies will benefit from
improved financial performances by internationalizing their virtual resources.
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