The Valuation of Ecommerce Announcements during Fluctuating Financial Markets

ABSTRACT If there are abnormal returns on an eCommerce initiative, and these returns are different during bull and bear markets, then we know that the markets value these investments with consideration of overall market health. This is reasonable, as market health, a proxy for the general economy, will affect cash flow benefits received through such things as the broadening of the customer base. If this is the case and the valuation is subjective, then stock volume and gains to the investor and the corporation itself will vary in sympathy with market movement. This study researches these aspects of returns due to eCommerce announcements. We use event study methodology to assess the cumulative abnormal returns (CARs) and cumulative abnormal volumes (CAVs) from eCommerce initiatives announced by firms in the SP Subramani and Walden, 2001; Oh and Kim, 2001). Wide-ranging news announcements that have shown an impact on firms' stock prices include changes in dividend policy, stock splits, layoff announcements, key personnel changes, and even celebrity endorsements. This new and unpredicted information, received by the financial market, can be perceived as contributing positively or negatively (valuation) toward the future ongoing cash flows of the corporations involved and has been associated with a stock price reaction in the same direction. A widely accepted explanation for this well-established empirical finding, first suggested by Miller and Modigliani (1961), emphasizes the role of signaling asymmetric information. Recently, Stiglitz (2000) concurred and noted that the extent of information asymmetries is affected by the actions of firms. Because management is better informed than the market about future prospects of their firms, their actions may convey new information to investors. Within the IS literature, the impact of new unexpected IT investment information has been mixed. Im et al. (2001), replicating the study from Dos Santos et al. (1993), found no significant increases in the market valuation of firms from announced corporate IT investments. Furthermore, they found no significant reaction on firm trading volume to these announced IT investments. On the other hand, Subramani and Walden (2001) found significant increases in market valuation of firms from eCommerce announcements. The intuitive purpose of this study is founded upon the meteoric rise in use of the Internet in the late 1990's and its' value (strategic and monetary) to corporations. Geyskens et al. (2002) found that eCommerce investments yielded value both on the demand and supply side strategies. We propose that the value found in both the demand side and the supply side will be affected by overall market health. We test for cumulative abnormal returns (CARs) of the firms that make up the Standard and Poor 100 index resulting from corporate announcements of IT investments in eCommerce. We test whether the CARs of firms announcing IT investments in eCommerce during bull and bear market phases are statistically different from the general market's return (S&P 500 Index) and whether the CARs during this bear market phase are consistent with those during the bull market. Following Im et al. (2001), we also test the cumulative abnormal volumes (CAVs) of firms announcing IT investments in eCommerce during the separate bull and bear market periods to identify whether investor's reactions to these types of IT investments were viewed positively by bidding up a firm's stock price with a corresponding increase in volume. Volume is an indication of variation in the individual investor's respective beliefs about the value of the firm. …