Y2K Myth or Reality

In: Business and Management

Submitted By thakkar030
Words 298
Pages 2
Y2K: Myth or Reality?
Luis Garcia-Feijóo
Creighton University
John R. Wingender, Jr.
Creighton University
We examine the valuation effects to Y2K-related announcements. We find that the announcement-day abnormal return is not significantly different from zero for the whole sample. Firms announcing the attainment of a Y2K-related contract, however, experience a statistically significant abnormal return of 0.76 percent on the day of the announcement. In contrast, firms that announce that they are Y2K-ready experience a statistically significant negative abnormal return of –0.36 percent on the announcement day. For these companies, regression analysis reveals that abnormal returns are higher the more a firm spent on fixing or preventing Y2K-related problems. Furthermore, Y2K-ready stocks have outperformed industry peers following the year 2000 both in terms of operating and stock return performance. The evidence suggests that investors understood the severity of the problem and were able to distinguish between companies for which the issue was important and those for which it was not.
Introduction
The Y2K bug was due to a common source code used in computer software.
Computer systems routinely were programmed for two-digit year entries to save storage space. Therefore, computers could have read 00 as 1900 and failed to recognize
2000 on January 1, 2000. At one point economist Dr. Edward Yardeni, then chief economist at the Deutches Bank Securities, had a comprehensive website on
Y2K effects for the world economy. Dr. Yardeni genuinely was concerned that the
Y2K bug seriously would worsen the global economic recession he himself predicted for the year 2000. In addition, the Securities and Exchange Commission required publicly traded companies to report their Y2K compliance in their financial statements.
Looking back, however, the millennium…...

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