The Value-Relevance of Network Advantages : The Case of E-Commerce Firms

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 website traffic have substantial explanatory power for stock prices over and above traditional summary accounting measures such as earnings and book value of equity. 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. Network effects are most valuable to auction sites and portals. Network advantages are positively associated with one-year ahead and two-year ahead earnings forecasts provided by equity analysts