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The Value Relevance of Network Advantages: The Case of E–Commerce Firms
Author(s) -
Rajgopal Shivaram,
Venkatachalam Mohan,
Kotha Suresh
Publication year - 2003
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.00099
Subject(s) - explanatory power , earnings , business , equity (law) , relevance (law) , book value , value (mathematics) , financial economics , economics , accounting , actuarial science , computer science , philosophy , epistemology , machine learning , political science , law
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.