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 Web site traffic have substantial explanatory power for stock prices over and above traditional summary accounting measures such as earnings and book value of equity. Also, network advantages are positively associated with one–year–ahead and two–year–ahead earnings forecasts provided by equity analysts. 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.

In this study we investigate the valuation implications of managerial actions undertaken by 57 Internet firms engaged in Business‐to‐Business (B2B) e‐commerce. We classify 3,007 managerial actions undertaken by our sample firms between the firm’s IPO date and September 30, 2000 into nine action categories: (1) acquisition of major customers, (2) introduction of new products and services, (3) promotional and marketing actions, (4) actions taken to address the concerns of stakeholders such as employees and the community at large, (5) announcements of technology, marketing, and distribution alliances, (6) completion of acquisitions, (7) expansion into international markets, (8) management team building actions, and (9) organizational changes. In the short window tests, we find a significant increase in stock price volatility over a three‐day event window surrounding the announcement of almost all actions suggesting that announcement of managerial actions provides value‐relevant information to the stock market. In the long window tests, we use factor analysis to group the counts of managerial actions taken by each firm over its post‐IPO life into two broad managerial initiatives—market penetration and organization building. These two initiatives explain a substantial portion of the cross‐sectional variation in the firms’ post‐IPO life stock market returns beyond that explained by both reported earnings and analysts’ forecasts of future earnings and revenues. Thus, investors appear to supplement relatively meager accounting information with data about the cross‐sectional intensity of managerial actions in setting stock prices of B2B Internet firms.