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Who Drove and Burst the Tech Bubble?




  • TAO SHU,


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    • Griffin is at the University of Texas at Austin, Harris is at the University of Delaware, Shu is at the University of Georgia, and Topaloglu is at Queen's University. We thank NASDAQ for providing access to some of the essential data while Harris was a NASDAQ Visiting Academic Fellow. We thank Cam Harvey, an associate editor, and two anonymous referees for extensive comments that greatly improved the paper. We are grateful to Robert Battalio; Markus Brunnermeier; Alistair Byrne; Eric Falkenstein; Ken French; Michael Gallmeyer; Will Goetzmann; Frank Hatheway; Nick Hirschey; David Hirshleifer; Roger Ibbotson; Ravi Jagannathan; Steve Jordan; Jason Karceski; Patrick Kelly; Josef Lakonishok; Stephen F. LeRoy; Spencer Martin; Federico Nardari; Bob Parrino; Allen Poteshman; Avri Ravid; Jay Ritter; Geert Rouwenhorst; Laura Starks; René Stulz; Shyam Sunder; Anjan V. Thakor; Fabio Trojani; and seminar participants at Arizona State University, the Chinese University of Hong Kong, Dartmouth College, European Finance Association Conference, FMA European Conference in Stockholm, Indiana University Bubble Conference, The Ohio State University, Texas A&M University, University of Illinois, University of Maryland, University of New South Wales, University of Texas, University of Toronto, Washington University, and Western Finance Association Conference for helpful comments. We thank John Bai, Rolando Campos, Nick Hirschey, Kelvin Huang, Jordan Nickerson, Stephen Virgilio, Qi Zhang, Xin Zhang, Ligang Zhong, and especially Michael Yates for research assistance. Parts of this paper are drawn from the working paper “Investor Behavior over the Rise and Fall of NASDAQ.” Topaloglu gratefully acknowledges the financial support of the Social Sciences and Humanities Research Council of Canada.


From 1997 to March 2000, as technology stocks rose more than five-fold, institutions bought more new technology supply than individuals. Among institutions, hedge funds were the most aggressive investors, but independent investment advisors and mutual funds (net of flows) actively invested the most capital in the technology sector. The technology stock reversal in March 2000 was accompanied by a broad sell-off from institutional investors but accelerated buying by individuals, particularly discount brokerage clients. Overall, our evidence supports the bubble model of Abreu and Brunnermeier (2003), in which rational arbitrageurs fail to trade against bubbles until a coordinated selling effort occurs.