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?