Journal of Accounting Research Vol. 41 No. 1 March 2003 Printed in U.S.A. The Value Relevance of Network Advantages: The Case of E-Commerce Firms SHIVARAM RAJGOPAL, * MOHAN VENKATACHALAM, † AND SURESH KOTHA ‡ Received 3 July 2001; accepted 9 July 2002 ABSTRACT We show that network advantages constitute an important intangible as- set 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. 1. Introduction In this article we document that the stock market values network ad- vantages over and above traditional financial statement information for a ∗ Duke University; †Duke University; ‡University of Washington. Rajgopal and Venkatachalam appreciate funding from the University of Washington and Stanford Uni- versity, respectively. Kotha thanks the Neal Dempsey Fellowship and the Jones Foundation for support. We thank an anonymous referee, Dave Burgstahler, Liz Demers, Sunil Kumar, Rick Lambert, Richard Leftwich (the editor), Anu Ramanathan of Amazon.com, Terry Shevlin, and workshop participants at the University of British Columbia, Oregon, and Washington (UBCOW) in January 2000 and the European Finance Association (EFA) meetings at London in August 2000 for their comments and suggestions. We acknowledge Nola Jean Bamberry’s editorial assistance. 135 Copyright C , University of Chicago on behalf of the Institute of Professional Accounting, 2003