TABLE OF CONTENTS This section presents an alternative approach for examining the interrelated nature of the accounting and non-financial variables used in the valuation of Internet firms. Figure 1, recreated from Kozberg (2001), specifies a hypothetical path for web-activity-dependent firms from start-up to revenue generation. This paper expands upon Figure 1 to develop a more detailed, empirically testable, path diagram.
Conceptually, management initiates expenditures on R&D, intending to establish (or enhance) a website's quality. The potential effects of this spending may offset one another, however. Increased site quality should improve a firm's ability to retain viewers, which can be proxied for by the amount of time spent and the number of visits made per person to its websites. On the other hand, website R&D expenditures could be focused upon aspects of quality such as improved delivery times (lowering the average time spent online) rather than on adding further content (potentially increasing time online). Regardless of the means by which quality improves, however, the websites should generate larger audiences as the result of improved brand recognition and from reputation effects.
In addition to spending on R&D, firms may choose to engage in major advertising campaigns and other promotions (SG&A) designed to attract new visitors to their websites. These increases in audience should improve the quantity of user-generated content. It should also allow more opportunities for members to develop into communities with those possessing similar interests. As a result, increased SG&A could have the secondary effect of encouraging existing members to use their...
