Unlike shares purchased with personal capital, stock options are often treated like "house money." This incentivizes CEOs to make excessively risky bets with shareholder capital because they capture all the upside but are not punished for failure, leading to poor capital allocation.
A 1994 law discouraging shareholder lawsuits created a sense of diminished risk for executives and accountants. This regulatory shift fostered a permissive climate where misleading financial reports and accounting fraud could flourish with fewer perceived legal consequences, directly contributing to the bubble.
During the bubble, a lack of profits was paradoxically an advantage for tech stocks. It removed traditional valuation metrics like P/E ratios that would have anchored prices to reality. This "valuation vacuum" allowed investors' imaginations and narratives to drive stock prices to speculative heights.
The supposed "research" from Wall Street analysts was compromised by cronyism. Analysts often functioned as promoters for companies their firms held as clients, attending plush conferences to "toot client stocks." Their compensation was tied to generating banking business, not providing accurate analysis for investors.
The dot-com era's accounting fraud wasn't one-sided. Professional investors and Wall Street created a symbiotic relationship with executives by demanding impossibly smooth, predictable quarterly earnings. This intense pressure incentivized widespread financial engineering and manipulation to meet unrealistic expectations.
Enron convinced regulators to let it use "mark-to-market" accounting for illiquid assets like pipelines. This allowed them to book highly subjective, projected profits from long-term deals as immediate earnings, creating a facade of profitability that had no basis in actual cash flow.
At the bubble's peak, the market valued intangible, narrative-driven companies like eToys more than profitable, asset-heavy businesses like Toys R Us. Physical stores and cash-generating operations were seen not as assets but as an "albatross" weighing down stock prices in the new economy.
Facing a glut of fiber optic cable, telecom companies created fake revenue through "capacity swaps." They would trade identical broadband leases with competitors for large, identical sums of cash. The money was simply round-tripped, but each company booked the incoming cash as new revenue, masquerading the industry's collapse.