Breakthrough markets, innovation and internet firms

We examine the extent to which financial factors affected stock price movements of internet firms between 1998 and 2007. We classify internet firms into two categories: breakthrough internet firms (BIFs) and reformed internet firms (RIFs), and examine the differences between them. We find that many internet firms suffer from losses, especially in their early years, and that cash flows have played a more important role in the valuation of internet firms than net income or sales. We also find that leverage has a negative effect on stock returns for both types of internet firms with a greater effect for RIFs than for BIFs, and that growth has a positive impact on stock returns for BIFs but a negative impact for RIFs. Overall, BIFs on average perform better than RIFs. These findings imply that blue ocean strategies or innovations do not always create profits but may cost more in early years of strategy, and that breakthrough markets are better for the firms to increase their values than reformed markets. In addition, the results also imply that innovation can be achieved by small firms in the perfect competition, different from the Schumpeterian hypothesis.