Explanatory Factors For Internet Firm Survival Changed Over Time

Debt Load Not Important Before Crash, Important Afterwards; Researchers Find Just the Opposite for Digital/Physical Product Offerings by Firms

MISRC and School of Public Health Researchers Recognized with "Best Paper Award" in Xi'an, China at 2005 International Conference on Electronic Commerce

First draft: August 22, 2005
Last revised: September 5, 2005

Beijing, China (August 22, 2005) -- On August 16, 2005, Sudipto Banerjee, an Assistant Professor of Biostatistics in the School of Public Health, Robert J. Kauffman, Director of the MIS Research Center and Information and Decision Sciences Department Chair at the Carlson School of Management, and Bin Wang, an assistant professor in the business school at the University of Texas, Pan American, received the "Best Research Paper Award" at the 2005 International Conference on Electronic Commerce. Their paper, entitled "A Dynamic Bayesian Analysis of the Drivers of Internet Firm Survival" examines the reasons why some Internet firms survived and others failed during the cataclysmic final years of the "DotCom Economy" in 2001 and 2002. They focused on how the drivers of Internet firm survival appear to have changed over the period 1997 to 2002. They presented their new research results in Xi'an, China at the university conference hotel of Xi'an Jiao Tong University to an international audience of university faculty and students, and public sector representatives.

Professor Bin Wang comments: "I am fortunate to have been able to acquire data on DotCom mergers, acquisitions and bankruptcies through the sponsorship of the San Francisco-based firm, Webmergers.com, and with the help of its president, Tim Miller (now VP and General Manager, Financial Markets of the 451 Group). I began this relationship late in my first year as a doctoral student at the Carlson School of Management. During the ensuing years, my research efforts have emphasized trying to understand the primary drivers of the survival of Internet firms. Recently I have focused on such issues as whether the firm is involved in a market that has been transformed by Internet technology but already existed, or in a market which is an entirely new development due to the technology. I have also been trying to understand what standard financial measures affect an Internet firm's survivability - especially things like the firm's stock price changes over time, and the degree to which it carries a high debt load. The study of these issues was complicated by the 2001 crash of the tech stocks in the United States. The Internet firms took an even harder fall. In the research presented in Xi'an, I emphasized two factors that have turned out to be important: the firm's debt ratio, and whether the firm sold digital or non-digital products. Our results show that Internet firms that sold physical goods were increasingly prone to failure during the DotCom crisis, but this became less important to their survival afterwards. In contrast, once the market for tech stocks had gone into a nose dive, sound financials became important for DotCom firms - just like all of the other market-listed firms."

MISRC Director, Rob Kauffman, offers a different perspective about the research he and his colleagues have been conducting. He remarks: "The strength of our research lies in its interdisciplinary innovations and fresh thinking. We always benefit by putting together world class teams of researchers who can study an area and find new ways of thinking, and new ways of analyzing data - and, as a result, can deliver a better understanding of the ever-changing environment of technology and business. In this research project, Bin Wang and I were fortunate to work with Sudipto Banerjee, an expert on the biostatistical analysis of human survival in the medical and public health context. Through our work with Sudipto, we were able to acquire knowledge of new statistical techniques that permit us to study the trajectory of key explanatory variables and their impacts on DotCom failure and survival over time.

This paper is one of several in this area of research included in the MIS Research Center's Working Paper Series written by Professors Kauffman and Wang, reflecting the Center's commitment to research on competitive strategy and technology. The initial paper in this stream of research studied the properties of the group-buying mechanism of the failed Internet firms, Mercata and Mobshop. Titled "New Buyers' Arrival under Dynamic Pricing Market Microstructure: The Case of Group-Buying Discounts on the Internet," this paper was published in 2001 in the Journal of Management Information Systems after it received a "best paper" nomination at the Hawaii International Conference on Systems Science earlier that same year. An earlier paper, entitled "When Internet Companies Morph: Understanding Organizational Strategy Changes in the 'New' New Economy," was published in July 2002 in the Internet policy journal, First Monda y. A third paper, entitled "Bid Together, Buy Together: On the Efficacy of Group-Buying Models in Internet-Based Selling," was also published in 2002 in The Handbook of Electronic Commerce in Business and Society. It chronicles the demise of group-buying on the Internet, and offers insights and reasons about why this sub-sector of electronic auctions came into being as an "innovation before its time." Two other new papers on dynamic markets by Professor Kauffman and colleagues from Tsinghua University in Beijing, China study related issues. One paper analyzes the use of "cooperation rings" as a means to coordinate participants who wish to benefit from volume ordering leverage in group-buying markets. It is forthcoming at the Hawaii International Conference on Systems Science in January 2006. A second paper discusses the design principles for public procurement combinatorial auctions. It offers some ideas that are intended to support procurement at the 2008 Beijing Olympics and other public-entity purchasing activities.

This award-winning research is a part of the doctoral dissertation research of in Wang, who completed her doctorate at Minnesota two years ago. She is a past graduate of Ren Min University in Beijing, China, and also has a master's degree from Purdue University, where she studied Marketing. She initiated her research on this topic in doctoral courses on IS, electronic commerce, and economics taught by MIS Research Center Director, Rob Kauffman, and in courses on Biostatistics taught by various faculty from the University of Minnesota's School of Public Health Biostatistics Division. She has presented other related research at many conferences and universities in the United States during the past several years.

The international recognition that this work has received in 2005 reflects the continuing high quality of the research that has been done in the MIS Research Center during the past several years. Other awards for research have been won by MIS Research Center-affiliated faculty, Mani Subramani and Weidong Xia, various Carlson School PHD students, and other faculty colleagues. They include "best research papers" at:

• 2004 INFORMS Conference on Information Systems and Technology (by Professor Mark Bergen of the Marketing Department at Carlson, Professor Kauffman, and doctoral student Dongwon Lee of Information and Decision Sciences).
• 2004 Hawaii International Conference on Systems Science (by Professor Kauffman and Professor Angsana Techatassanasoontorn, who recently joined the School of Information Science and Technology at Pennsylvania State University, and will soon graduate with a University of Minnesota doctorate).
• 2003 INFORMS Conference on Information Systems and Technology (by Professor Kauffman and Professor Hamid Mohtadi, an economist at the University of Wisconsin, Milwaukee)
• 2002 ACM Special Interest Group on Computer Personnel Research Workshop (by Assistant Professor Weidong Xia, and Assistant Professor Ruth King of the University of Illinois)
• 2000 Americas Conference on Information Systems (Professor Kauffman, and Carlson School doctoral graduate, Assistant Professor Charles Wood of the Notre Dame University)
• 2000 International Conference on Information Systems (also authored by Professors Kauffman and Wood)
• 1999 Workshop on Information Technology and Systems (Assistant Professor Qizhi Dai, another doctoral graduate now at Drexel University, Professor Kauffman, and past-Carlson School faculty, Professor Sal March, now at Vanderbilt University)
• 1999 International Conference on Information Systems (Associate Professor Mani Subramani, and past doctoral graduate, Assistant Professor Eric Walden, now at Texas Tech University)

The MIS Research Center is also the research home of Professor Alok Gupta, who won a prestigious National Science Foundation Career Award for his research work on mercantile exchange and electronic auction market design several years ago. Another associated faculty member is Assistant Professor Fred Riggins, a noted authority on RFID and business and government policies related to the "digital divide," who will continue to lead the MISRC's RFID Research Project during the 2005-2006 school year.

To obtain a copy of the papers mentioned above, or to browse the contents of our research archive, please visit the MIS Research Center's Working Papers section on the World Wide Web at misrc.umn.edu, or write directly to the authors.