MN7542 Financial Modelling: Determine how this information can be used

Module: MN7542 Financial Modelling

Assignment  Question

Read carefully the case notes below and consider the information shown in the appendix. Determine how this information can be used to shed light on the factors that influence the performance of initial public offering (IPO) firms. Then write a report for the Directors of CRPD which addresses this issue.

The performance of IPO firms You have recently been appointed as an analyst within PMC Inc. PMC is a UK consultancy company that undertakes independent research for clientorganisations. Your first client is a large investment management firm (CRPD) which provides advice and administrative services to both individuals and companies in relation to portfolio selection and specific asset purchase (stocks, bonds, etc.). CRPD are interested in identifying historical factors which impact on the future performance of companies newly floated on the stock exchange. This concept of a previously private owned firm offering shares to the public for the first time is frequently referred to as an initial public offering (IPO) and usually involves relatively young firms looking to expand their activities. You have been asked to undertake some quantitative analysis looking at this issue. While you are familiar with various different aspects of statistics and a number of statistical packages you have not undertaken a project of this nature before. Hence you start by conducting a literature search. This search proves beneficial and you find that there are a number of existing studies which look at the performance of IPO firms, although none specifically in a UK context. In terms of theoretical work one of the overarching themes is that of the principal/agent problem. Firstly, this suggests that the owners or managers of a firm may not provide all relevant information to potential investors in an attempt toinflate the initial offer price of the company’s shares. Secondly, there is the possibility that the owner(s) of the firm are deliberately diluting their ownership in an attempt to mitigate the effects of problems foreseen in the future but as yet undisclosed to the public.

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