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Researchers recently examined the initial public offering (IPO)

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Sajjad1994
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Researchers recently examined the initial public offering (IPO) [#permalink] New post   Updated on: 04 Oct 2023, 01:09
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Researchers recently examined the initial public offering (IPO) -- a private firm's first sale of stock shares to the public -- of firms listed on Kenya's Nairobi Stock Exchange (NSE) between 1994 and 2008. During this time, the number of IPOs listed per year varied from zero to four. The researchers wanted to examine the extent to which four different variables -- investor sentiment, firm size, board prestige, and firm age -- affected the IPO stock share price, which is set by the firm. They hypothesized that all four variables would show a strong positive correlation with this IPO asking price. However, after examing the firms listed, they were surprised to find that none of the variables showed a strong positive correlation with IPO pricing, and in fact investor sentiment and board prestige both showed a strong negative correlation.

The researcheres also discovered that nearly all of these IPOs were underprised by an average of 50 percent, which is to say the IPO share prices were about half of what the share prices were at the close of the first day of trading. Such underpricing constitutes a loss to the listed firm because the firm could have immediately raised more money with a higher price. The researchers noted that firms should take care to set an IPO price low enough to capture investor interest but high enough to generate sufficient capital for the firm.
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1. The discussion of the researchers' study of Kenyan IPOs refers to "board prestige" primarily to
help explain why investor sentiment toward some firms is sometimes very low
caution that some variables should not be considered accurate predictors of IPO pricing
introduce one of the variables whose relationship to IPO pricing surprised the researchers
point to one of the attributes firms often used to generate investor interest in their IPO
demonstrate that some attributes of a firm are often negatively correlated with the firm's IPO price
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introduce one of the variables whose relationship to IPO pricing surprised the researchers

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2. For each of the following statements, select Inferable if the statement is reasonably inferable from the information provided about the NSE IPOs. Otherwise select Not Inferable.
Yes No
IPOs of firms with prestigious boards were mor likely to be underpriced than those of other firms.
Firestone East Africa set its IPO price slightly lower than it should have.
At least one of the firms examined by the researchers did not have an underpriced IPO.
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IPOs of firms with prestigious boards were mor likely to be underpriced than those of other firms.: No Firestone East Africa set its IPO price slightly lower than it should have.: No At least one of the firms examined by the researchers did not have an underpriced IPO.: Yes

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3. For each of the following statements, select Supported if the statement is supported by the information provided about NSE IPOs. Otherwise select Not supported.
Supported Not Supported
The board of Safaricom was likely considered more prestigious than that of Co-Operative Bank at the time of their IPOs.
Kenya Re and Eveready were approximately the same size firms at the time of their IPOs.
When their IPO prices were set, investor sentiment was likely more favorable toward Kengen than toward Scangroup or Eveready.
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The board of Safaricom was likely considered more prestigious than that of Co-Operative Bank at the time of their IPOs.: Supported Kenya Re and Eveready were approximately the same size firms at the time of their IPOs.: Not Supported When their IPO prices were set, investor sentiment was likely more favorable toward Kengen than toward Scangroup or Eveready.: Not Supported

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Originally posted by Sajjad1994 on 25 Apr 2020, 02:10.
Last edited by BottomJee on 04 Oct 2023, 01:09, edited 8 times in total.
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Re: Researchers recently examined the initial public offering (IPO) [#permalink] New post   16 Jul 2022, 12:45
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Official Explanations for Q2 and Q3 are inconsistent:

Q2(1): IPOs of firms with prestigious boards were more likely to be underpriced than those of other firms.
OE: Board prestige is one of the four variables examined by the researchers for any correlation they may have with IPO pricing. The discussion of underpriced IPOs does not involve these variables, and while board prestige is found by the researchers to be negatively correlated with IPO price, it cannot therefore be inferred that a lower IPO price has any correlation with an IPO being underpriced.
The correct answer is Not inferable.

Q3(1): The board of Safaricom was likely considered more prestigious than that of Co-Operative Bank at the time of their IPOs.
OE: The passage indicates that the researchers found a strong negative correlation between board prestige and IPO price (lines 14-19). In other words, the lower the IPO price of a firm, the more prestigious that firm's board is likely to be. Looking at the table of Kenyan IPOs for 2008, Safaricom had an IPO price of 5.00 Kenyan shillings and Co-Operative Bank had an IPO price of 9.50 shillings, suggesting that Safaricom's board was more prestigious than Co-Operative Bank's.
The correct answer is Supported.

Q3(3): When their IPO prices were set, investor sentiment was likely more favorable toward Kengen than toward Scangroup or Eveready.
OE: The passage indicates that the researchers found a strong negative correlation between investor sentiment and IPO price (lines 14-19). In other words, the higher the IPO price of a firm, the lower investor sentiment toward that firm is likely to be. Looking at the table of Kenyan IPOs for 2006, Kengen had an IPO price of 11.90 Kenyan shillings, whereas Scangroup (10.45) and Eveready (9.50) had lower IPO prices, suggesting that investor sentiment was likely less favorable toward Kengen than toward either Scangiroup or Eveready.
The correct answer is Not supported.

Do the GMAC guys have any standard when creating questions?
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Re: Researchers recently examined the initial public offering (IPO) [#permalink] New post   25 Apr 2020, 06:46
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1)C,introduce one of the variables whose relationship to IPO pricing surprised the researchers,since it gives a surprise to the researchers that why underpricing was there and what are parameters to compelete the study.

2)a)No,since with prestigious board negative correlation was there and it was not increasing the likelihood
b)No,it set a higher price
c)Yes,Firststone and Mumias sugar are exceptions

3)a) Supported beacuse safaricom had more underpricing
b)Not supported since there is nothing mentioned about firm size
c)Not supported since that might be less supported and effect could be from board prestige

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Re: Researchers recently examined the initial public offering (IPO) [#permalink] New post   26 Apr 2020, 05:57
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1. The discussion of the researchers' study of Kenyan IPOs refers to "board prestige" primarily to

A. help explain why investor sentiment toward some firms is sometimes very low
B. caution that some variables should not be considered accurate predictors of IPO pricing
C. introduce one of the variables whose relationship to IPO pricing surprised the researchers
D. point to one of the attributes firms often used to generate investor interest in their IPO
E. demonstrate that some attributes of a firm are often negatively correlated with the firm's IPO price


Correct Answer - C,
Explanation - as mentioned in the para: They hypothesized that all four variables would show a strong positive correlation with this IPO asking price. However, after examing the firms listed, they were surprised to find that none of the variables showed a strong positive correlation with IPO pricing, and in fact investor sentiment and board prestige both showed a strong negative correlation.



2. For each of the following statements, select Inferable if the statement is reasonably inferable from the information provided about the NSE IPOs. Otherwise select Not Inferable.

1. No - since as we saw, the board prestige had a negative effect on pricing.
2. No - its the opposite as we can infer from the last row of the table.
3. Yes - Firestone, and Mumias Sugar have -1.41 and 0.00% underpricing.


3. For each of the following statements, select Supported if the statement is supported by the information provided about NSE IPOs. Otherwise select Not supported.

1. Supported, as we can infer from the table row of Safaricom and Co-operative bank and the information in the passage above, that the mentioned statement is supported by the information.
2. Not Supported, nothing is mentioned in the passage w.r.t firm size and its effect of the pricing of IPO's.
3. Not Supported, as we cannot explicitly infer, if it was actually from the investor sentiment or other factors like board pricing (which is actually mentioned).
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Re: Researchers recently examined the initial public offering (IPO) [#permalink] New post   27 Jun 2020, 07:33
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Can someone please explain, how the below statements have the opposite answers? Either both should be Yes( and in my opinion Yes should be the answer ) or both should be No.

"IPOs of firms with prestigious boards were more likely to be underpriced than those of other firms"

"The board of Safaricom was likely considered more prestigious than that of Co-Operative Bank at the time of their IPOs"
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Re: Researchers recently examined the initial public offering (IPO) [#permalink] New post   27 Jun 2020, 11:07
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Suryanshi wrote:
Can someone please explain, how the below statements have the opposite answers? Either both should be Yes( and in my opinion Yes should be the answer ) or both should be No.

"IPOs of firms with prestigious boards were more likely to be underpriced than those of other firms"

"The board of Safaricom was likely considered more prestigious than that of Co-Operative Bank at the time of their IPOs"



Hi Suryanshi,

1. The answer to :"IPOs of firms with prestigious boards were more likely to be underpriced than those of other firms" would be No, as its mentioned in the IPO Pricing passage: "However, after examing the firms listed, they were surprised to find that none of the variables showed a strong positive correlation with IPO pricing, and in fact investor sentiment and board prestige both showed a strong negative correlation."
=> the board prestige had a negative effect on pricing.

2. The answer to : "The board of Safaricom was likely considered more prestigious than that of Co-Operative Bank at the time of their IPOs" - this would true, i.e supported as asked in the question, since we can infer from the table row of Safaricom and Co-operative bank and the information in the passage above, that the mentioned statement is supported by the information.

Hope it helps.
thanks.
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Re: Researchers recently examined the initial public offering (IPO) [#permalink] New post   28 Jun 2020, 05:41
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Hi bm2201,

Thank you for the explanation. Really appreciate that. But I am still not able to understand and here is the reason.

What I deduce from below line ""However, after examing the firms listed, they were surprised to find that none of the variables showed a strong positive correlation with IPO pricing, and in fact investor sentiment and board prestige both showed a strong negative correlation" is that since board prestige has a negative correlation with IPO pricing, so if board prestige is high, IPO pricing will be low and this is what sentence "IPOs of firms with prestigious boards were more likely to be underpriced than those of other firms" says.

Seeing the data of Co-operative bank and Safari bank, we were able to relate the difference in their prices at the day start and day end with board prestige. Safaricom was more undervalued and therefore it was likely that its board had more prestige than co-operative bank's. That's why the answer for this statement "The board of Safaricom was likely considered more prestigious than that of Co-Operative Bank at the time of their IPOs" was Yes.

Based on above reasoning according to me answer to the first statement should also be Yes. Now, I know there must be big loophole in my understanding somewhere. Would really appreciate if you can pinpoint the same.
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Re: Researchers recently examined the initial public offering (IPO) [#permalink] New post   22 Dec 2020, 16:48
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Suryanshi wrote:
Hi bm2201,

Thank you for the explanation. Really appreciate that. But I am still not able to understand and here is the reason.

What I deduce from below line ""However, after examing the firms listed, they were surprised to find that none of the variables showed a strong positive correlation with IPO pricing, and in fact investor sentiment and board prestige both showed a strong negative correlation" is that since board prestige has a negative correlation with IPO pricing, so if board prestige is high, IPO pricing will be low and this is what sentence "IPOs of firms with prestigious boards were more likely to be underpriced than those of other firms" says.

Seeing the data of Co-operative bank and Safari bank, we were able to relate the difference in their prices at the day start and day end with board prestige. Safaricom was more undervalued and therefore it was likely that its board had more prestige than co-operative bank's. That's why the answer for this statement "The board of Safaricom was likely considered more prestigious than that of Co-Operative Bank at the time of their IPOs" was Yes.

Based on above reasoning according to me answer to the first statement should also be Yes. Now, I know there must be big loophole in my understanding somewhere. Would really appreciate if you can pinpoint the same.


I agree with the OA that the first answer of Q2 should be no; but it is the answer in Q3 that is questionable.

According to the prompt, there are 2 factors that negatively relate to asking price (lower asking price --> more likely underpriced):
1. investor sentiment
2. prestigious board
The board itself will not be able to affect the asking pricing alone - one must consider the investor sentiment. Therefore, the board itself is not an indicator of the asking price and the answer should be no.

However, the first OA for Q3 contradicts such logic, for it assumes that the board is the only factor affecting asking price (thus the underpricing). What if the primary reason for Safaricom's underpricing is investor sentiment while the primary reason for Co-Operative Bank's underpricing is the board?
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Re: Researchers recently examined the initial public offering (IPO) [#permalink] New post   02 May 2022, 05:36
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I don't understand question number 2

2. For each of the following statements, select Inferable if the statement is reasonably inferable from the information provided about the NSE IPOs. Otherwise select Not Inferable.

"IPOs of firms with prestigious boards were more likely to be underpriced than those of other firms."
According to the passage, it tells that
However, after examining the
(15) firms listed, they were surprised to find that
(16) none of the variables showed a strong positive
(17) correlation with IPO pricing, and in fact investor
(18) sentiment and board prestige both showed a
(19) strong negative correlation.

Therefore, prestigious boards do negatively affect to the IPO price and then make the firms underpriced.

Why the answer is no
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Re: Researchers recently examined the initial public offering (IPO) [#permalink] New post   23 Nov 2023, 01:51
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I finally understand. The sentiment and broad prestige only affect the set of the IPO price, which do not affect the first day closing price. Therefore, the lower the IPO price have nothing relate to the first day closing price, and the under price percentage.
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Re: Researchers recently examined the initial public offering (IPO) [#permalink] New post   06 Jan 2024, 23:23
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xiafan0521 wrote:
I finally understand. The sentiment and broad prestige only affect the set of the IPO price, which do not affect the first day closing price. Therefore, the lower the IPO price have nothing relate to the first day closing price, and the under price percentage.


Yes. PRICING and UNDERPRICED are two different concepts. Here PRICING refers to the absolute price number.
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Re: Researchers recently examined the initial public offering (IPO) [#permalink] New post   14 Jan 2024, 09:43
Gmat Ninja can you please clear the ambiguity for q2 and q3?
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Re: Researchers recently examined the initial public offering (IPO) [#permalink] New post   15 Jan 2024, 07:03
A bit confused by 3 c: since the P0 value is higher, can we infer that the sentiments towards kengen was more favorable?
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Researchers recently examined the initial public offering (IPO) [#permalink] New post   04 Feb 2024, 12:02
Hi Sajjad1994

Kindly can you post the official explanation for Q2 and Q3 ? Some options in both these questions are creating ambiguity.

GMATNinjaTwo, @GMATCoachBen Can you pls help with Q2 and Q3 correct answers with explanations ?

Thanks !
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Researchers recently examined the initial public offering (IPO) [#permalink] New post   03 Mar 2024, 22:46
chetan2u
Sir,
Please explain question 2 option b.
I marked it non inferebale because of "The researchers noted that firms should take care to set an IPO price low enough to capture investor interest but high enough to generate sufficient capital for the firm."
but there was no info about about wheather Firestone East Africa have ­generate sufficient capital for the firm.
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