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Downward-Sloping Demand Curves, the Supply of Shares, and the Collapse of Internet Stock Prices



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    • Paul Schultz is from the University of Notre Dame. I am grateful for comments by Robert Battalio, Pete Kyle, Tim Loughran, Wei Xiong, and seminar participants at the University of Notre Dame, the 2006 Oxford Finance Symposium, and the 2007 American Finance Association meetings. I remain entirely responsible for blunders, gaffes, etc.


Over March and April 2000, Internet stocks lost 56%, or $700 billion. This sudden collapse has been attributed to an increasing supply of shares from lockup expirations and equity offerings. I show that Internet stocks collapsed in this period regardless of whether their lockups expired. Furthermore, daily Internet stock portfolio returns were almost unaffected by the number or dollar amount of lockup expirations that day, or by the amount of stock offered in IPOs or SEOs. Most of the Internet stock decline is explained by poor marketwide returns, particularly for growth stocks.