Working Papers

2013
Lin M, Viswanathan S. Social Science Research Network Working Paper Series [Internet]. 2013. Publisher's VersionAbstract
An extensive literature in economics and finance has documented “home bias,” the tendency that transactions are more likely to occur between parties in the same geographical area, rather than outside. Using data from a large online crowdfunding marketplace and employing a quasi-experimental design, we find evidence that home bias still exists in this virtual marketplace for financial products. More importantly, we find that economic reasons do not fully explain home bias, and that emotions toward one’s home state play an important role. Empirical support for this come from the observations that investors often forgo strictly better alternatives (lower risk and higher return) when investing in home state borrowers; that home state loans offer lower financial returns; and that loan requests with more geography-related words are more likely to attract same state bids. As crowdfunding becomes an alternative and appealing channel for financing, a better understanding of home bias in this new context provides important managerial, practical, and policy implications.
Kim K, Viswanathan S. Social Science Research Network Working Paper Series [Internet]. 2013. Publisher's VersionAbstract
This paper examines the role of experts in an online crowdfunding market. Using a novel data set on individual investments in a crowdfunding market for mobile applications, we investigate whether early investments serve as signals of quality for later investors, and if the value of these signals differs depending on the identity of early investors. We find that two categories of experts – app developer investors and experienced investors – tend to invest early. We also find that while both types of experts are likely to influence the crowd, the specifics of their expertise determine their influence. App developer investors who have a better knowledge of the product are found to be more influential for “concept apps” (apps in the pre-release stage), while experienced investors – investors with a better knowledge of market performance are found to be more influential for “live apps” (apps that are already being sold in the market). Our findings show that the majority of investors in this market – the crowd – although inexperienced, are rather sophisticated in their ability to identify and exploit nuanced differences between various signals within the same market. In examining the ex-post performance of apps, we find that successful funding in the market is positively associated with ex-post app sales. Contrary to popular perceptions of crowdfunding markets as means for democratizing expertise and substitutes for traditional expert-dominated mechanisms, our findings indicate that despite the choice provided by these crowd-based markets, the crowd’s decisions are highly influenced by experts participating in these markets.
2011
Ye S, Gao G, Viswanathan S. Social Science Research Network Working Paper Series [Internet]. 2011. Publisher's VersionAbstract
This study examines how sellers respond to changes in the design of reputation systems on eBay. Specifically, we focus on one particular strategic behavior on eBay’s reputation system – the sellers’ explicit retaliation and subsequent revoking of negative feedback provided by buyers. We examine how these strategic sellers respond to the removal of their ability to retaliate against buyers and to revoke negative feedback. We utilize the biggest policy change of eBay’s reputation system in its history, which provides a natural experimental setting that allows us to infer the causal impact of the reputation system on seller behavior. Our results show that revoking enables low quality sellers to manipulate their reputations and masquerade as high-quality sellers. We find that these sellers react strongly to eBay’s announcement of a proposed ban on revoking. Interestingly, after the power of these revokers is curtailed, we find evidence that they exert more effort to improve their reputation scores. This study provides valuable insights about the relationship between reputation system and seller behavior, which have important implications for the design of online reputation mechanisms.
2010
Liu D, Viswanathan S. Social Science Research Network Working Paper Series [Internet]. 2010. Publisher's VersionAbstract
Pay-for-performance (P4P) pricing schemes such as pay-per-click and pay-per-action have grown in popularity in Internet advertising. Meanwhile, the traditional pay-per-impression (PPI) scheme persists, and several advertising publishers have started to offer a hybrid mix of PPI and P4P schemes. Given the proliferation of pricing scheme choices, our study examines the optimal choices for advertising publishers. We highlight two-sided information asymmetries in online advertising markets and the consequent tradeoffs faced by a high-quality publisher using P4P schemes. When there exists information asymmetry, P4P pricing schemes enable a high-quality publisher to reveal her superior quality; on the other hand, they may incur allocative inefficiencies stemming from inaccurate estimates of advertiser qualities. Our study identifies conditions under which a publisher may opt for a PPI, P4P, or a hybrid scheme and in doing so provides a theoretical explanation for the observed variations in the pricing schemes across publishers. Using a new “uncompromised” equilibrium refinement, we also demonstrate that the hybrid scheme can emerge as an equilibrium choice in a wide range of conditions. In addition to explaining the co-existence of multiple pricing schemes and the growing popularity of hybrid pricing schemes, our study also provide prescriptive guidelines for firms making choices among different pricing schemes.
Lin M, Viswanathan S, Agarwal R. Social Science Research Network Working Paper Series [Internet]. 2010. Publisher's VersionAbstract
Technology enables new ways of monitoring worker efforts, new ways of contracting, and consequently new ways of sharing risks in outsourcing arrangements. Using a comprehensive dataset from an online outsourcing marketplace, we study whether and how new contractual arrangements (pay-for-deliverable versus pay-for-time contracts) impact the effectiveness of sellers' reputations on the chances of winning outsourcing contracts. Our results show that online reputation is an important predictor of winning a contract only for pay-for-deliverable contracts, but not significant for pay-for-time contracts. In other words, contract forms can potentially mitigate the typical Matthew Effect (“the rich get richer”) associated with online reputation systems, in which established sellers are more likely to win new contracts, resulting in a concentrated marketplace. More broadly, our results suggest that as technology allows more effective monitoring of worker efforts, buyers tend to rely more on first-hand information through monitoring, and less on second-hand historical information embedded in online reputation systems.
Ramachandran V, Viswanathan S, Lucas H. Social Science Research Network Working Paper Series [Internet]. 2010. Publisher's VersionAbstract
This study seeks to examine how different types of information – product-related and price-related information provided by retailers – impact purchase-related outcomes for consumers belonging to different states of shopping. Using mixture-modeling techniques on clickstream data obtained from a large online durable goods retailer, we find that a three-state model comprised of directed shoppers, deliberating researchers and browsers, best describes the latent differences across customers. In examining the impacts of information on purchase outcomes, we find that product and price-related information impacts consumers in these three shopping states differently. While product information highlighting features of product alternatives in a category has the strongest impact on deliberating researchers, specific price information related to category-level discounts increases the likelihood of purchase for both directed shoppers as well as browsers. Price information relating to site-wide free shipping has a positive impact on purchase for all consumers. Surprisingly, category-level discounts have a negative impact on deliberating researchers, while rich product information hampers the purchase process of directed shoppers. We discuss the managerial implications of our findings and the role of clickstream analytics in designing dynamic targeting and information provisioning strategies for online retailers.
Ye S, Gao G, Viswanathan S. Social Science Research Network Working Paper Series [Internet]. 2010. Publisher's VersionAbstract
This study investigates a crucial aspect of the reputation mechanism design in electronic markets – the ability of buyers and sellers to revoke or mutually withdraw negative feedback and ratings. Based on an analysis of recent changes in eBay’s feedback mechanism design, we find that the two-way reputation system enables certain sellers to behave opportunistically by revoking negative feedbacks they receive. This makes the reputation system less effective in discerning the quality of sellers. We also find that changes in the reputation system have a significant influence on these sellers’ behaviors. After eBay’s ban on revoking, sellers exert more effort to improve the quality of their transactions. Our findings support the moral hazard assumption regarding seller’s strategic behavior. We discuss the implications of the above findings for reputation mechanism design and practice.
Özpolat K, Gao G, Jank W, Viswanathan S. Social Science Research Network Working Paper Series [Internet]. 2010. Publisher's VersionAbstract
Although third-party trust seals have been in use for long by online retailers, systematic studies of the effectiveness of these trust signaling mechanisms are scarce. Using a unique dataset of over a quarter million online transactions across 493 online retailers, this study seeks to empirically measure the value and effectiveness of trust seals on the likelihood of purchase by shoppers. The dataset is collected from a randomized field experiment by a large trust seal provider, which enables us to infer the causal impacts of the presence of an online trust seal. We find that the presence of the online trust seal increases the odds of completion of purchase. We further find that online trust seals serve as partial substitutes for both shopper experience and seller size. Interestingly, the effect of the number of trust seals is not linear – we find that the presence of too many seals lower completion rates. We discuss the implication of our findings for online retailers, third-party certifiers, as well as for policy makers.
2009
Lin M, Prabhala N, Viswanathan S. Social Science Research Network Working Paper Series [Internet]. 2009. Publisher's VersionAbstract
We study the online market for peer-to-peer (P2P) lending, in which individuals bid on unsecured microloans sought by other individual borrowers. Using a large sample of consummated and failed listings from the largest online P2P lending marketplace - Prosper.com, we find that the online friendships of borrowers act as signals of credit quality. Friendships increase the probability of successful funding, lower interest rates on funded loans, and are associated with lower ex-post default rates. The economic effects of friendships show a striking gradation based on the roles and identities of the friends. We discuss the implications of our findings for the disintermediation of financial markets and the design of decentralized electronic markets.
2008
Kuruzovich J, Viswanathan S, Agarwal R, Gosain S, Weitzman S. Social Science Research Network Working Paper Series [Internet]. 2008. Publisher's VersionAbstract
The growth of the Internet has spawned an increasing number of online information sources (OISs). The effect of OISs on consumer information search processes has been particularly striking in sectors such as auto retailing, where the typical consumer has conventionally confronted an unpleasant and inefficient purchase process. However, the relationships between the information found in the online "marketspace," consumer search in the offline "marketplace," and other aspects of the multichannel shopping process are not well understood. This study examines the differential impact of price and product information found in the marketspace, relating consumers' information needs and information retrieval from OISs to three shopping-related outcomes - purchase based on online infomediary referral (i.e., referred purchase), intensity of search in the marketplace, and online search satisfaction. We draw upon a large dataset of more than 16,000 new vehicle purchasers who reported using the Web for search related to their new vehicle purchase. We find that online information sources offer different levels of price and product information and consumers are differentiated in their ability to retrieve this information. Further, the retrieval of price versus product information online has important implications for whether consumers consummate their online search through referred purchase or extend their search into the physical marketplace. Our results suggest different business models for infomediaries providing price and product information and underscore the need for designing information provisioning systems of OISs to facilitate transition between the marketspace and the marketplace.
Kuruzovich J, Viswanathan S, Agarwal R. Social Science Research Network Working Paper Series [Internet]. 2008. Publisher's VersionAbstract
It has become widely accepted that information technology (IT) has had a profound influence on market transactions, with lower search costs for buyers often considered the key to lower prices and higher consumer welfare. However, sellers also use online channels to search for buyers whose product preferences and valua-tions match the sellers’ offerings, and limited research has examined the impact of IT on sellers’ search strat-egies or associated market outcomes. In this study, we investigate how market characteristics, the length of time the seller searches the auction marketplace for a buyer, and seller search in other websites influence the final sale price in online auctions. The online auction market for used vehicles provides a valuable oppor-tunity to observe search processes of sellers, as the unique VIN associated with each vehicle enables the tracking of an individual item across both subsequent auctions and across other websites. We find that the market characteristics, duration of search, and search in other websites are each associated with a higher final sale price. Our findings highlight the importance of examining both buyer and seller search behaviors to fur-ther our understanding of the impacts of IT on market outcomes and efficiency.
Stohr E, Viswanathan S, White L. Social Science Research Network Working Paper Series [Internet]. 2008. Publisher's VersionAbstract
Information Systems Working Papers Series
Viswanathan S, Tsechansky M, Ramanathan S. Social Science Research Network Working Paper Series [Internet]. 2008. Publisher's VersionAbstract
This paper studies the dimensions underlying user involvement with Websites and buildsupon the existing body of knowledge on involvement with traditional media. A multidimensionalbipolar semantic differential scale based on Zaichkowsky's Personal InvolvementInventory is used to identify the factors that determine the level of involvement in a Website.Websites are then classified, based on these factors, as high or low involvement sites.Involvement with Web sites was found to comprise of three dimensions - cognitive, affective andstructural. Among these, the cognitive and the affective dimensions were found to have thehighest discriminating power between high and low involvement sites while the structuraldimension was found to serve as a moderating factor.
Bakos Y, Oh W, Viswanathan S, Simon G. Social Science Research Network Working Paper Series [Internet]. 2008. Publisher's VersionAbstract
Electronic brokerages on the Internet represent one of the most successful examples ofelectronic commerce, having captured over 20% of retail stock trades. According toeconomic theory, prices of commodities like securities should converge to one price in amarket with the transparency of the Internet. A review of published commissions foronline brokers shows that this "law of one price" does not appear to hold for thecommissions charged by retail brokers. In this paper we explore one possible explanationfor these differences in commissions. Specifically, we test whether the total cost oftrading, including commissions and savings based on the quality of execution, obeys thelaw of one price. In a carefully designed experiment, we simultaneously purchased orsold 100 share lots of stock using a voice-broker, an expensive online broker and aninexpensive online broker in each trial. We found relatively few price improvements,which are a measure of execution quality. The difference among brokers in obtainingprice improvements was not statistically significant. The brokers do exhibit statisticallysignificant differences in total trading costs; at a volume of 100 shares commission costsdominate execution quality. We explore the implications of the findings for larger lotsizes, choosing a broker, and electronic commerce in the brokerage industry.
Stohr E, Viswanathan S. Social Science Research Network Working Paper Series [Internet]. 2008. Publisher's VersionAbstract
Information Systems Working Papers Series
Aron R, Sundararajan A, Viswanathan S. Social Science Research Network Working Paper Series [Internet]. 2008. Publisher's VersionAbstract
Apart from reducing buyer search costs, web-based commerce has also enabled the use ofintelligent agent technologies that reduce seller search costs by targeting buyers, customizing,and pricing products in real-time. Our model of an electronic market with customizable productsanalyzes the pricing, profitability and welfare implications of these agent-based technologiesthat price dynamically, based on product preference and demographic information revealed byconsumers. We find that in making the trade-off between better prices and better customization,consumers invariably choose less-than-ideal products. Furthermore, this trade-off impactsbuyers on the higher end of the market more, and causes a transfer of consumer surplus towardsbuyers with a lower willingness to pay. As buyers adjust their product choices in responseto better demand agent technologies, sellers may experience reduced revenues, since the gainsfrom better buyer information are countered by the lowering of the total value created fromthe transactions. We study the strategic and welfare implications of these findings, and discussmanagerial and technology development guidelines.
Bailey J, Gao G, Jank W, Lin M, Lucas H, Viswanathan S. Social Science Research Network Working Paper Series [Internet]. 2008. Publisher's VersionAbstract
Sales by small volume sellers are systematically undercounted in public and private surveys of ecommerce. The twin results are that the contribution of small sellers to the ecommerce marketplace is considerably larger than generally assumed and the overall market is larger by this difference. As the costs of selling things online have fallen with cheaper equipment and communications fees, and with the availability of retail platform services provided by eBay, Amazon.com, Google, and many other firms, Internet retailing has grown to include many small businesses and individual occasional sellers, particularly in the United States. But how much do these "small sellers" sell each year? U.S. Government statistics give some insight into the type and sales volume of online sellers, but the Government's current methods of data collection and analysis are better suited to tracking larger, traditionally organized businesses, rather than "small sellers," whether operating as small businesses or as individuals. Traditionally, small sellers simply were ignored. In traditional retail markets, the number of businesses with low annual revenues may not be significant because the contribution of such small sellers to the overall size of the market is relatively small. However, in Internet retailing, there are millions of small sellers that, in the aggregate, make a large contribution to the overall market. Yet these small sellers are systematically overlooked in government and private data collection and analysis. In this paper, we estimate the size of Internet retailing in 2004 to have been over 20% above U.S. Government estimates - and the difference is explained by a more accurate accounting of sales by small sellers. We do this through a variety of methods and the development of confidence intervals in our data. We hope that the techniques outlined in this paper will give greater insight into the magnitude of Internet retailing, particularly in the "long tail" of the ecommerce market occupied by small volume sellers.
2007
Animesh A, Viswanathan S, Agarwal R. Social Science Research Network Working Paper Series [Internet]. 2007. Publisher's VersionAbstract
Although the efficiency-enhancing features of online markets have been well studied, much less is known about firms' differentiation strategies in these competitive markets, or the outcomes of such differentiation. This study examines competition among firms in online sponsored search markets - one of the fastest growing and most competitive of online markets. Given the nascence of online sponsored search and the lack of sophisticated differentiation strategies, firms have primarily sought to be listed on top of the search results, leading to intense competition. With the rapid evolution of sponsored search markets from simple auctions to sophisticated forums for customer acquisition, the need to go beyond a myopic focus on competing for the top slots and seek effective differentiation strategies is becoming clear. In this paper we develop and test a model that predicts the clickthrough rate (CTR) of a seller's listing in a sponsored search setting. Drawing upon consumer search theory and competitive positioning strategies we theorize that the CTR is jointly driven by the seller's positioning strategy as reflected by the unique selling proposition (USP) in its "ad-creative," by its rank in the sponsored search listing, and the nature of competition around the focal seller's listing. We use data from a field experiment conducted by leading firm in the mortgage industry where the firm varied its rank and USP dynamically. Results suggest that sponsored search listings can act as an effective customer segmentation mechanism, consistent with a model of consumer search in directional markets. We further find that the effect of the firm's positioning strategy and its rank in the listing on CTR is strongly moderated by its ability to differentiate itself from adjacent rivals. We discuss the implications of our findings for sellers' strategies in sponsored search markets and for extending understanding of consumer search behavior in directional markets.
Animesh A, Viswanathan S, Agarwal R. Social Science Research Network Working Paper Series [Internet]. 2007. Publisher's VersionAbstract
The digitization of commerce has caused fundamental changes in consumer information search and use. With an increasing number of consumers using search engines as an integral component of their online purchase process, online sponsored search markets, such as those provided by Google and Yahoo!, have emerged as a dominant customer acquisition mechanism for sellers. Given the extent of information asymmetry in online markets, consumers rely on a number of informational cues or signals to infer the quality of sellers - advertising and price being the two most important among them. While the importance of advertising and price as signals of quality has been well established in traditional markets, online sponsored search markets have a number of unique characteristics that differentiate them from traditional settings and raise unanswered questions about the efficacy of different informational cues for consumers' search and transaction behaviors. Using a lab experiment, we examine how the knowledge of firms' relative advertising expenditures and prices affect consumers' search and purchase decisions. Contrary to earlier findings of the dominance of price signals in traditional markets, we find that firms' relative advertising expenditures serve as a stronger signal of quality in online sponsored search markets - a result attributable to the directional nature of these markets. We also find that the risk attitude of consumers has a significant impact on consumer beliefs and market outcomes. We discuss the implications of our findings for sellers and consumers using sponsored search markets, as well as for search intermediaries.
Ramachandran V, Viswanathan S, Gosain S. Social Science Research Network Working Paper Series [Internet]. 2007. Publisher's VersionAbstract
With the decentralization of information and the democratization of expertise brought about by the growth of the Web, consumers now have access to a plethora of information on various aspects of their purchase process. This study seeks to examine whether such decentralized online information substitutes or complements traditional centralized sources of information. Specifically, we examine how the increased access to online information alters the salience and value of conventional quality signaling mechanisms such as certification for consumers. We draw upon a unique and extensive dataset of consumers who obtained vehicle and transaction related information from online sources in their used vehicle purchase process to examine the impact of their information acquisition on the choice of certification, as well as the price paid. We compare the outcomes of sales across certified and non-certified used car purchases. Our findings highlight that product-related information substitutes, and price-related information complements, certification as indicated by their differential impacts on demand and price of certified used cars. We discuss the relevance of our findings for buyers and sellers and outline implications for online information providers as well.
Mantena R, Sankaranarayanan R, Viswanathan S. Social Science Research Network Working Paper Series [Internet]. 2007. Publisher's VersionAbstract
This paper develops and analyzes a model of competition between platforms in an industry with indirect network effects, with a specific focus on complementary product exclusivity. The objective is to understand the conditions under which complement exclusivity can be observed and analyze the impact of exclusivity on industry outcomes. We find that the stage of platform market maturity and the asymmetry between the installed bases of platforms are critical determinants of exclusivity. Exclusivity is much more likely in the nascent stages of the platform market, but sometimes results in the very mature stages as well. Non-exclusivity is the most likely outcome in the intermediate stages. In the nascent stages, the bigger platform secures exclusivity, while in the mature stages, surprisingly there exist conditions under which the smaller platform is able to secure exclusivity. The stage of the platform market maturity also has a critical impact on the division of surplus between platforms and complement developers. With exclusive contracting, high quality complements that have a strong impact on consumer's platform adoption decisions often become competitive necessities and appropriate most of the surplus generated.
2006
Bharath S, Viswanathan S. Social Science Research Network Working Paper Series [Internet]. 2006. Publisher's VersionAbstract
Possibly. We empirically examine the plausibility of rational models designed to explain stock price bubbles associated with technological revolutions such as the internet. Our innovation is to examine the volatility patterns of old economy (brick and mortar) firms that adopted the internet as a medium of commerce (e-Commerce). During the bubble, there is an increase in idiosyncratic risk for firms adopting the technology while post-crash, there is an increase in systematic risk for the same technology adoption by firms both in the stock and options markets. We find some quantitative evidence that the weight of the e-Commerce business to justify the median firm's volatility increase in the bubble period, is borne out five years later with the actual sales data. Overall we conclude that our evidence is consistent with rationality and that both rational and behavioral approaches must provide quantitative predictions in order to have a sharper face off and to better understand asset price bubbles.
2005
Animesh A, Ramachandran V, Viswanathan S. Social Science Research Network Working Paper Series [Internet]. 2005. Publisher's VersionAbstract
Online sponsored search advertising has emerged as the dominant online advertising format largely due to their "pay-for-performance" nature, wherein advertising expenditures are closely tied to outcomes. While the pay-for-performance format substantially reduces the "wastage" incurred by advertisers compared to traditional "pay-per-exposure" advertising formats, the reduction of such wastage also carries the risk of reducing the signaling properties of advertising. Lacking a separating equilibrium, low quality firms in these markets may be able to mimic the advertising strategies of high quality firms. This study examines this issue in the context of online sponsored search markets. Using data gathered from sponsored search auctions for keywords in an unregulated market we find evidence of adverse selection for products/services characterized by high uncertainty. On the other hand, there is no evidence of adverse selection for similar products in a regulated sponsored search market, suggesting that intervention by the search intermediary can have a significant impact on the market outcomes and consumer welfare.
Viswanathan S, Kuruzovich J, Gosain S, Agarwal R. Social Science Research Network Working Paper Series [Internet]. 2005. Publisher's VersionAbstract
This paper focuses on a novel mechanism for market segmentation and price discrimination based on consumers' use of online infomediaries. Using the auto-retailing context as the setting for our study we address the following question: Can online infomediaries serve as a viable mechanism for market segmentation and price discrimination for traditional dealers and manufacturers? We draw upon a unique and extensive dataset of consumers who report on their information retrieval patterns as well as their online buying services (OBS) usage patterns in their new vehicle purchase process. The analysis of information retrieval patterns shows that consumers who obtain price information pay lower prices (for the same vehicle) compared to consumers who obtain product information. While this points to the existence of consumer segments with significantly different willingness-to-pay for the same product, this knowledge is of limited value without a viable mechanism that enables firms to specifically identify and target these customer-segments. Based on consumer usage patterns of OBSs, we then uncover distinct OBS clusters and empirically demonstrate that the usage of these different clusters is associated with predicted differences in consumer outcomes. We also show that the differential use of online infomediaries (OBS clusters) is systematically related to underlying consumer characteristics. We discuss the relevance of our findings for auto-dealers and manufacturers as well as for other industries where online infomediaries have established a significant presence.
2004
Bakos Y, Lucas H, Oh W, Simon G, Viswanathan S, Weber B. Social Science Research Network Working Paper Series [Internet]. 2004. Publisher's VersionAbstract
This paper analyzes the impact of e-commerce on markets where established firms face competition from Internet-based entrants with focused offerings. In particular, we study the retail brokerage sector where the growth of online brokerages and the availability of alternate sources of information and research services have challenged the dominance of traditional brokerages. We develop a stylized game-theoretic model to analyze the impact of competition between an incumbent full-service brokerage firm with a bundled offering of research services and trade execution and an online entrant offering just trade execution. We find that as consumers' willingness-to-pay for research declines, the incumbent finds it optimal to unbundle its offering when competing with the online entrant. We also find that the online entrant chooses a lower quality of trade execution when faced with direct competition from the incumbent's unbundled offering. The analytical model motivates a unique field experiment placing actual simultaneous trades with traditional full-service and online brokers, to compare order handling practices and the quality of trade execution. In keeping with our analytical results, our empirical findings show a significant difference in the quality of execution between online brokerages and their full-service counterparts. We discuss the relevance of our findings for quality differentiation, price convergence and profit decline in a variety of markets where traditional incumbents are faced with changes in the competitive landscape as a result of e-commerce.
2003
Agrawal D, Bharath S, Viswanathan S. Social Science Research Network Working Paper Series [Internet]. 2003. Publisher's VersionAbstract
This paper is among the first to use a unique controlled empirical setting - traditional firms' adoption of the Internet for commerce - to investigate the impact of changes in firms' technological environment on their stock return volatility. Using three distinct empirical methodologies we detect a significant increase in the idiosyncratic and total stock return volatility when a firm initiates eCommerce. Interestingly, this increase in volatility is observed only for firms that moved online post-June 1998, a period when Internet growth reached critical mass. We find that this increase in volatility is attributable to changes in the firms' product markets, specifically increased demand uncertainty, resulting from the adoption of a new technology-driven channel. We also find that the volatility increase is highest for retailers followed by manufacturers and service firms. Relevant controls rule out firm-specific characteristics as well as market microstructural factors as possible explanatory variables. Our results provide strong evidence of the impact of real activity within a firm on its stock return volatility and highlight the importance of understanding the impact of technological innovations on firms' risk-return profiles.