Analyzing the Financial Characteristics of Internet Firms - are They so Different from Traditional Firms?

Abstract

This paper seeks to identify the characteristics that differentiate Internet firms achieving positive operating profits from persistent loss makers. The study uses a sample of firms operating different online business models during the period 1998-2002. Our findings indicate that profitable firms achieve better solvency and liquidity due to the contribution of fresh capital by investors and increasing self-financing, and have lower indebtedness compared to loss makers. The continuing inability of a large number of Internet businesses to achieve profitability leads both investors and venture capital firms, the main sources of finance open to the firms during the period 1998-2000, to concentrate on other sectors and tighten the conditions that they are willing to fund ventures. These actions oblige firms to borrow while continuing losses and rising debt affect their solvency.

Keywords: Internet firms, business information, e-commerce, profitability.

JEL Classification: M2, M4, O3