Business & Finance – Financial markets

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.

6. This assignment accounts for 40% of the total internal assessment.

(End of Assignment III)

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