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Researchers recently examined the initial public offering (IPO)
Updated on: 04 Oct 2023, 01:09
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IPO Pricing 1994-2008 IPOs

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Sajjad1994 Researchers recently examined the initial public offering (IPO)
-- a private firm's first sale of stock shares to the public -- of DIFFICULTY: QUESTION STATS: Saturday, Feb 24,
IR & RC Forum Moderator
firms listed on Kenya's Nairobi Stock Exchange (NSE) 45% (medium) 68% (02:38) correct 32% (02:31) wrong based on 136 sessions 10am NY; 3pm London, 8:30pm Mumbai
Joined: 02 Nov 2016 between 1994 and 2008. During this time, the number of IPOs
HIDE TIMER STATISTICS
Status:GMAT Club Team listed per year varied from zero to four. The researchers
Member wanted to examine the extent to which four different variables 1. The discussion of the researchers' study of Kenyan IPOs refers
Affiliations: GMAT Club -- investor sentiment, firm size, board prestige, and firm age -- to "board prestige" primarily to
affected the IPO stock share price, which is set by the firm. Subscribe to us on YouTube AND Get FREE
Posts: 14504
They hypothesized that all four variables would show a strong help explain why investor sentiment toward some firms is Access to Premium GMAT Question Bank for 7
Own Kudos [?]: 30873 [15]
sometimes very low Days
positive correlation with this IPO asking price. However, after
Given Kudos: 5696 examing the firms listed, they were surprised to find that none
caution that some variables should not be considered accurate
of the variables showed a strong positive correlation with IPO
predictors of IPO pricing
GPA: 3.62
pricing, and in fact investor sentiment and board prestige both Free GMAT Club Tests,
FOLLOW showed a strong negative correlation. introduce one of the variables whose relationship to IPO pricing Internships at GMAT Club, FT
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surprised the researchers MBA Rankings, more GMAT &
The researcheres also discovered that nearly all of these IPOs MBA stories
point to one of the attributes firms often used to generate investor
were underprised by an average of 50 percent, which is to say
interest in their IPO
the IPO share prices were about half of what the share prices
were at the close of the first day of trading. Such underpricing demonstrate that some attributes of a firm are often negatively
constitutes a loss to the listed firm because the firm could correlated with the firm's IPO price
have immediately raised more money with a higher price. The
researchers noted that firms should take care to set an IPO Submit
price low enough to capture investor interest but high enough
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to generate sufficient capital for the firm.

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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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DIFFICULTY: QUESTION STATS:

95% (hard) 29% (02:10) correct 71% (01:51) wrong based on 130 sessions

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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

AGSM at UNIVERSITY OF CALIFORNIA
The board of Safaricom was likely
RIVERSIDE
considered more prestigious than that of
Co-Operative Bank at the time of their
IPOs.

Kenya Re and Eveready were Tuck at Dartmouth

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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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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Program 2024 intake Class of 2025
Re: Researchers recently examined the initial public offering (IPO)
25 Apr 2020, 06:46 12 mins RatnaSingh
[#permalink]

Which of the following functions has as its

 2 Kudos  domain the set of all real
13 mins LamboWalker
1)C,introduce one of the variables whose relationship to IPO pricing surprised the researchers,since it gives a surprise to the researchers
D that why underpricing was there and what are parameters to compelete the study. Calling Simon Rochester MBA Applicants:
2024 Intake Class of 2026
Apt0810 2)a)No,since with prestigious board negative correlation was there and it was not increasing the likelihood 17 mins Acueep

Senior Manager b)No,it set a higher price

In the 1930’s and 1940’s, African American
Joined: 15 Jul 2018 c)Yes,Firststone and Mumias sugar are exceptions industrial workers in the s

Posts: 351 25 mins SnorLax_7

3)a) Supported beacuse safaricom had more underpricing
Own Kudos [?]: 376 [2] b)Not supported since there is nothing mentioned about firm size People who have spent a lot of time in contact
with animals often
Given Kudos: 94 c)Not supported since that might be less supported and effect could be from board prestige
27 mins samagra__

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Re: Researchers recently examined the initial public offering (IPO)

26 Apr 2020, 05:57
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 1 Kudos 
bM22
1. The discussion of the researchers' study of Kenyan IPOs refers to "board prestige" primarily to
Retired Moderator

Joined: 05 May 2016 A. help explain why investor sentiment toward some firms is sometimes very low
Posts: 799 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
Own Kudos [?]: 672 [1]
D. point to one of the attributes firms often used to generate investor interest in their IPO
Given Kudos: 1316
E. demonstrate that some attributes of a firm are often negatively correlated with the firm's IPO price
Location: India

Schools: IIM (A) IIM (A)

IIM-A '24 (A) ISB '24 (A) Correct Answer - C,
Explanation - as mentioned in the para: They hypothesized that all four variables would show a strong positive correlation with this IPO
FOLLOW asking price. However, after examing the firms listed, they were surprised to find that none of the variables showed a strong positive
 Send PM 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)

27 Jun 2020, 07:33
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 3 Kudos 

Can someone please explain, how the below statements have the opposite answers? Either both should be Yes( and in my opinion Yes
B should be the answer ) or both should be No.

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

Joined: 06 Oct 2019 "The board of Safaricom was likely considered more prestigious than that of Co-Operative Bank at the time of their IPOs"

Posts: 14

Own Kudos [?]: 6 [3]

Given Kudos: 8

Schools: Tepper '23 (A)

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Re: Researchers recently examined the initial public offering (IPO)

27 Jun 2020, 11:07
[#permalink]

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 1 Kudos 
bM22
 Suryanshi wrote:
Retired Moderator

Joined: 05 May 2016

Can someone please explain, how the below statements have the opposite answers? Either both should be Yes( and in my opinion Yes
Posts: 799 should be the answer ) or both should be No.
Own Kudos [?]: 672 [1]
"IPOs of firms with prestigious boards were more likely to be underpriced than those of other firms"
Given Kudos: 1316

Location: India "The board of Safaricom was likely considered more prestigious than that of Co-Operative Bank at the time of their IPOs"
Schools: IIM (A) IIM (A)
IIM-A '24 (A) ISB '24 (A)

FOLLOW
Hi Suryanshi,
 Send PM

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)

28 Jun 2020, 05:41
[#permalink]

Hi bm2201,
B
Thank you for the explanation. Really appreciate that. But I am still not able to understand and here is the reason.
Suryanshi
Current Student What I deduce from below line ""However, after examing the firms listed, they were surprised to find that none of the variables showed a
Joined: 06 Oct 2019 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
Posts: 14
sentence "IPOs of firms with prestigious boards were more likely to be underpriced than those of other firms" says.
Own Kudos [?]: 6 [0]

Given Kudos: 8 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
Schools: Tepper '23 (A) 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
FOLLOW the time of their IPOs" was Yes.

 Send PM
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)

22 Dec 2020, 16:48
[#permalink]

 2 Kudos 

 Suryanshi wrote:
B

maikikiuu Hi bm2201,

Intern Thank you for the explanation. Really appreciate that. But I am still not able to understand and here is the reason.
Joined: 30 Sep 2018
What I deduce from below line ""However, after examing the firms listed, they were surprised to find that none of the variables
Posts: 23
showed a strong positive correlation with IPO pricing, and in fact investor sentiment and board prestige both showed a strong
Own Kudos [?]: 8 [2] negative correlation" is that since board prestige has a negative correlation with IPO pricing, so if board prestige is high, IPO pricing
Given Kudos: 112 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.
FOLLOW
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
 Send PM 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)

02 May 2022, 05:36
[#permalink]

I don't understand question number 2

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

Joined: 31 Jan 2020 "IPOs of firms with prestigious boards were more likely to be underpriced than those of other firms."
According to the passage, it tells that
Posts: 233
However, after examining the
Own Kudos [?]: 13 [0] (15) firms listed, they were surprised to find that
Given Kudos: 139 (16) none of the variables showed a strong positive
(17) correlation with IPO pricing, and in fact investor
FOLLOW (18) sentiment and board prestige both showed a
(19) strong negative correlation.
 Send PM

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)

16 Jul 2022, 12:45
[#permalink]

 1 Kudos 

Official Explanations for Q2 and Q3 are inconsistent:

B
Q2(1): IPOs of firms with prestigious boards were more likely to be underpriced than those of other firms.
nisen20 OE: Board prestige is one of the four variables examined by the researchers for any correlation they may have with IPO pricing. The
Manager discussion of underpriced IPOs does not involve these variables, and while board prestige is found by the researchers to be negatively
Joined: 16 Jun 2020 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.
Posts: 57

Own Kudos [?]: 24 [1] Q3(1): The board of Safaricom was likely considered more prestigious than that of Co-Operative Bank at the time of their IPOs.
Given Kudos: 501 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
FOLLOW 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.
 Send PM
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)

23 Nov 2023, 01:51
[#permalink]

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.
B Therefore, the lower the IPO price have nothing relate to the first day closing price, and the under price percentage.

xiafan0521
Intern

Joined: 08 May 2022

Posts: 1

Own Kudos [?]: 0 [0]

Given Kudos: 11

Location: China

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Re: Researchers recently examined the initial public offering (IPO)

06 Jan 2024, 23:23
[#permalink]

 1 Kudos 

 xiafan0521 wrote:

Rita77 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.
Intern

Joined: 06 Jan 2024

Posts: 1
Yes. PRICING and UNDERPRICED are two different concepts. Here PRICING refers to the absolute price number.
Own Kudos [?]: 1 [1]

Given Kudos: 1

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Re: Researchers recently examined the initial public offering (IPO)

14 Jan 2024, 09:43
[#permalink]

Gmat Ninja can you please clear the ambiguity for q2 and q3?
B

Vijaisai44
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Joined: 21 Apr 2019

Posts: 4

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Given Kudos: 50

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Re: Researchers recently examined the initial public offering (IPO)

15 Jan 2024, 07:03
[#permalink]

A bit confused by 3 c: since the P0 value is higher, can we infer that the sentiments towards kengen was more favorable?
B

debanjanhalder
Intern

Joined: 08 Aug 2017

Posts: 13

Own Kudos [?]: 6 [0]

Given Kudos: 4

Concentration: General
Management, Operations

WE:Operations
(Manufacturing)

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Researchers recently examined the initial public offering (IPO)

04 Feb 2024, 12:02
[#permalink]

Hi Sajjad1994
B
Kindly can you post the official explanation for Q2 and Q3 ? Some options in both these questions are creating ambiguity.
SnorLax_7
Manager GMATNinjaTwo, @GMATCoachBen Can you pls help with Q2 and Q3 correct answers with explanations ?
Joined: 19 Nov 2022
Thanks !
Posts: 90

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Researchers recently examined the initial public offering (IPO)

04 Feb 2024, 12:02
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