South Sea Bubble Case Study

2.1.2 South Sea Bubble
The South Sea bubble is one of the firs bubbles with a real stock market crash. In the 17th century the financing of the United Kingdom was a complete unorganized and chaotic mess. Different government departments were responsible for their loans and there was a lack of a clear oversight on financial expenses and income. This all changed when a chancellor proposed to straighten out these inefficiencies. The first steps in straightening out the mess was the reconsideration of the monopoly right of the Bank of England. The Bank of England had the right to manage all the country’s loans on monopoly basis. By granting other private enterprises to participate in these loans more companies started to participate in loans on

America was on a winning streak in the pre-9/11 rise and the ‘dotcom’ economy was growing rapidly with new internet based companies popping up daily. During the dotcom the structural change was the relative new invention of the internet. Immensely high valuations and unprofitable business models were justified by the new market created by the internet. “In the two-year period from early 1998 through February 2000, the Internet sector earned over 1000 percent returns on its public equity. In fact, by this date, the Internet sector equaled 6 percent of the market capitalization of all U.S. public companies and 20 percent of all publicly traded equity volume” (Ofek & Richardson, 2003). Between 1998 and 1999 in total 147 small firms changes or adjusted their names so it contained “dotcom”. This “dotcom” name change produced 74% cumulative abnormal returns (CAR) for the 10 days surrounding the announcement day (Cooper, Dimitrov, & Rau, 2001). In March 2000 the rise abruptly came to an end with the burst of the dotcom bubble. Stock prices plummeted and enormous amounts of invested money

This resulted in a rise in equity markets fueled by the investments from over the world. Internet was a relative young and new invention which took an increasingly important part in people´s life. The American consumer culture started to shift from store retailers to an increase in online retailing. With the increased popularity of the internet and a growing amount of investments stock values started to grow rapidly. The value of the NASDAQ, the second biggest US index on technology companies, grew from around 1,000 point in 1995 to more than 5,000 points at the end of 2000. IPOs were creating ridicules returns for companies and shareholders. Stock prices sometimes doubling in value on the first trading day (Green & Goodnight, 2010). Because of this “hot” IPO market many firms, of which some not even active in the technology sector, raised capital through an IPO. This attracted both private and in institutional investors which raised stock prices even more.
March 11, 2000 all of this came to an end with stocks and the NASDAQ crashing. March 30 the NASDAQ was valued at 4,500 points compared to around 5,000 points at March 10. This meaning a loss of around $960 billion in just 15 trading days. Around the end of May, the NASDAQ was down to around 3.500 points indicating a loss of over the trillion dollars (http://www.nasdaq.com/markets/ipos/, 2015). With these