Raise Relevant Research/Business Finance – Management
You are expected to raise relevant research questions based on the following
background information and then investigate these questions using the provided data
set.
Background
Investors and financial economists are interested in understanding how the stock market
values a firm’s equity (i.e. shares). In a fundamental sense, the value of a firm’s shares
should reflect investors’ expectations of the firm’s future profitability. However, data
on expected future profitability is non-existent. Instead, empirical financial studies use
current firm characteristics (e.g. current accounting information) as explanatory
variables.
Most of the shares traded on the stock market are old shares in existing firms.
However, many old firms will issue some new shares in addition to those already
trading – these are referred to as “seasoned equity offerings” (SEOs). Furthermore,
some firms that have not traded shares on the stock market in the past may decide to
issue such shares (e.g. a computer software firm owned by one individual may decide
to “go public” and sell shares in order to raise money for future investment or
expansion). Such shares are called “initial public offerings” (IPOs). The market value
of IPO firms may be different from that of SEO firms, and this may be partially
explained by the firm characteristics.
Data
The data set in file EQUITY.TXT contains data on N = 309 firms who sold new shares
in the year 1996 in the US. Some of these are SEOs and some are IPOs. Data on the
following variables is provided. All variables except SEO are measured in millions of
US dollars.
VALUE = total value of all shares (new and old) outstanding just after the firm
issued the new shares. This is calculated as the price per share times the number of
shares outstanding.
DEBT = amount of long-term debt held by the firm.
SALES = total sales of the firm.
INCOME = net income of the firm.
ASSETS = book value of the assets of the firm (i.e. what an accountant would judge
the firm’s assets to be worth).
SEO = a dummy variable that equals 1 if the new share issue is an SEO and 0 if it
is an IPO.
The report will be assessed from the following aspects:
1) Question and hypothesis development: ask relevant research questions and provide
theoretical support to your hypothesis (10%)
2) Structure and presentation (10%)
3) Writings and explanations for your findings (20%)
4) Models, tables and graphs (20%): you should incorporate them in the main article
5) Data analysis techniques, including those covered in the recommended textbook
(25%)
6) Discussion on the limitations of your report (10%)
7) Reference (5%)
Notes:
1. A sample of academic research is provided for your reference. It will give you some
idea on what a good research report looks like. You can borrow the structure of the
sample research when appropriate but the main body of your report, excluding reference,
should not exceed 8 pages.
2. Plagiarism is a specific form of academic misconduct. If found, both parties will be
penalized regardless of who copies from whom.
3. The data file needed for this assignment is available on the course website under the
Assignment III folder, where this document is located.
5. Submit your report via Myweb by the due time.
