The Value Relevance of Network Advantages: The Case of E–Commerce Firms

Authors: Rajgopal S.¹; Venkatachalam M.¹; Kotha S.²

Source: Journal of Accounting Research, Volume 41, Number 1, March 2003 , pp. 135-162(28)

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Abstract:

We show that network advantages constitute an important intangible asset that goes unrecognized in the financial statements. For a sample of e–commerce firms, we find that network advantages created by Web site traffic have substantial explanatory power for stock prices over and above traditional summary accounting measures such as earnings and book value of equity. Also, network advantages are positively associated with one–year–ahead and two–year–ahead earnings forecasts provided by equity analysts. When we allow network advantages to be endogenously determined by managerial actions, we find that at least part of the value relevance of network effects stems from the presence of affiliate referral programs and higher media visibility.

Document Type: Research article

DOI: http://dx.doi.org/10.1111/1475-679X.00099

Affiliations: 1: Duke University, 2: University of Washington

Publication date: 2003-03-01