Shakeouts and Market Crashes

Abstract

Stock-market crashes tend to follow run-ups in prices. These episodes look like bubbles that gradually inflate and then suddenly burst. We show that such bubbles can form in a Zeira-Rob type of model in which demand size is uncertain. Two conditions are sufficient for this to happen: A declining hazard rate in the prior distribution over market size and a positively sloped supply of capital to the industry. For the period 1971-2001 we fit the model to the Telecom sector.

Industry Evolution and Entrepreneurship:StevenKlepper's Contributions to Industrial Organization, Strategy, Technological Change, and Entrepreneurship

“…According to at least one prominent neoclassical economist, the Gort‐Klepper findings and their analyses thereof ‘led to a richer set of conclusions, and a richer set of empirical regularities for theorists to puzzle over’ (Jovanovic, : 331). In fact, the ‘shakeout‐like’ process first noted by Gort and Klepper in these data alone have motivated many distinct (and highly cited) papers trying to develop a theory that would explain it (Barbarino and Jovanovic, ; Gort and Wall, ; Jovanovic and MacDonald, ; Jovanovic and Tse, ; Klepper, ). Within strategic management, the paper serves as an exemplar and a ‘valuable demonstration of how to derive clear, testable implications from theory, how to creatively and painstakingly collect data that will support a clear empirical test, and how to match theory to real‐world stylized facts’ (Silverman, : 72).…”

Technological innovation and market turbulence: The dot-com experience

“…Its ability to reach customers in vast geographic regions via the internet, while not having to invest in building physical facilities, has been among its most attractive features for investors and entrepreneurs. 1 During a short period in the late 1990s, about 7,000-10,000 new substantial dot-com companies were established, 2 most with a vision of generating huge market values after taking the firm public. The boom fueled tremendous excitement throughout the business world.…”

“…However, the costs of those are generally negligible compared to operating many store fronts. 2 Data Source: Webmergers.com, a San Francisco-based company that monitors the dot-com mergers and acquisitions. Webmergers.com counts as "substantial" all dot-com companies that have received some formal outside funding from venture capitalists or other investors.…”

Real Options With Unknown-Date Events

“…denote the hazard rate, that is, the instantaneous probability of the PLC reaching its maturity at date t given that this event has not occurred previously. As shown empirically by Barbarino and Jovanovic (2003), it sometimes can be natural to assume that the demand hazard rate is a non-increasing function, so let us assume this holds. 18 This ensures that…”