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)
