The Impact of E-Commerce Announcements on the Market Value of Firms

Firms are undertaking growing numbers of e-commerce initiatives and increasingly making significant investments required to participate in the growing online market. However, empirical support for the benefits to firms from e-commerce is weaker than glowing accounts in the popular press, based on anecdotal evidence, would lead us to believe. In this paper, we explore the following questions: What are the returns to shareholders in firms engaging in e-commerce? How do the returns to conventional,brick and mortar firms from e-commerce initiatives compare with returns to the new breed ofnet firms? How do returns frombusiness-to-business e-commerce compare with returns frombusiness-to-consumer e-commerce? How do the returns to e-commerce initiatives involvingdigital goods compare to initiatives involvingtangible goods? We examine these issues using event study methodology and assess thecumulative abnormal returns to shareholders (CARs) for 251 e-commerce initiatives announced by firms between October and December 1998. The results suggest that e-commerce initiatives do indeed lead to significant positiveCARs for firms' shareholders. While theCARs for conventional firms are not significantly different from those for net firms, theCARs forbusiness-to-consumer (B2C) announcements are higher than those forbusiness-to-business (B2B) announcements. Also, theCARs with respect to e-commerce initiatives involving tangible goods are higher than for those involving digital goods. Our data were collected in the last quarter of 1998 during a unique bull market period and the magnitudes ofCARs (between 4.9 and 23.4% for different subsamples) in response to e-commerce announcements are larger than those reported for a variety of other firm actions in prior event studies. This paper presents the first empirical test of thedot com effect, validating popular anticipations of significant future benefits to firms entering into e-commerce arrangements.