Technology Sector Privite Equity and a New Speculative Bubble - Term Paper Example

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Technology Sector Private Equity and a New Speculative Bubble C.J. Bordeleau Economics May 27, 2015 Technology Sector Private Equity and the Emergence of a New Speculative Bubble The rapid valuation growth of young private technology companies such as Facebook and Twitter is something that is often been highlighted in the media in recent months…
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Technology Sector Privite Equity and a New Speculative Bubble
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Download file to see previous pages Goldman intends to resell many of the shares to high net-worth individuals through its wealth management division. This “special investment vehicle” will exploit a loophole in securities law regarding private company ownership. According to US securities law, a private company is not permitted to have more than 500 individual investors without making its financial information public. Being a private company, Facebook is not required by the SEC to share financial information with investors at this time. Due to these above mentioned conditions surrounding these companies, speculation continues to be a driving force surrounding these investments. In this paper, we will take a look at the history and features of speculative bubbles including the technology bubble of the late nineties (dot com bust) in an attempt to use economic data to analyze today’s environment to detect the presence of a bubble and its potential impacts. The Origins of Speculative Bubbles Speculative bubbles have long fascinated and puzzled economists across many time periods. From the original Tulip Mania of the 1630’s to the Dot- Com bubble of the late nineties, these phenomena have kept economists on their toes for centuries, in trying to pin down substantive causative agents that are responsible for the swift increase in the market values of particular assets. Till today, experts have been unable to chalk down exact reasons for the emergence of such bubbles as they can rise up even in the most predictable markets; where the market participants can very accurately calculate the intrinsic value of the assets and where speculation plays no part in the actual valuation process. What is the origin of bubbles? Simply put, speculative bubbles are caused by “precipitating factors” that have the ability to bring about a change in the public’s perception about the value of an asset and about the future prospects of that asset, which can have an immediate impact on demand (Shiller , 2000) One of the most famous economists of all time, John Maynard Keynes pointed out in his book “The General Theory of Employment, Interest and Money”, that abrupt and immediate stock price changes have their roots in the “collective crowd behavior” of the various market agents more than anything else and that in almost all such scenarios, these rises in prices have little to do with the values that can be derived from “careful analysis of present conditions and future prospects of firms”. This seems to be a certainly accurate description of the conditions which surround the emergence and bursting of the speculative bubbles as seen in the past. Kindleberger in his book “Manias, Panics and Crashes: A History of Financial Crises” (1978), presents a summary of his observations regarding the historical pattern that these bubbles usually follow. He states that the increase in prices typically starts with the emergence or birth of opportunity, usually in the shape of new markets or cutting edge technology or some major change in the political landscape of a particular region which can pull in investors looking for excellent returns on their investments. This is followed by rising prices of the particular asset. In this phase, more and more people rush after the overpriced commodity, feeding fuel to the bubble, increasing prices further and feeding the mania, and at the same time causing credit ...Download file to see next pagesRead More
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