Researchers recently examined the initial public offering (IPO) -- a private firm's first sale of stock shares to the public...
GMAT Multi Source Reasoning : (MSR) Questions
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 examining 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 researchers also discovered that nearly all of these IPOs were underpriced 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.
The discussion of the researchers' study of Kenyan IPOs refers to "board prestige" primarily to
OWNING THE DATASET
Understanding Source A: Text - Research Report on Kenyan IPOs
| Information from Dataset | Analysis |
|---|---|
| "the number of IPOs listed per year varied from zero to four" |
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| "They hypothesized that all four variables would show a strong positive correlation with this IPO asking price" |
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| "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" |
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| "nearly all of these IPOs were underpriced by an average of 50 percent" |
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| "Such underpricing constitutes a loss to the listed firm because the firm could have immediately raised more capital with a higher price" |
|
Summary: Research on Kenyan IPOs (1994-2008) revealed surprising patterns - traditional pricing factors showed unexpected negative correlations, and systematic underpricing averaged 50%, causing firms to lose potential capital.
Understanding Source B: Table - Kenyan IPO Company Data
| Information from Dataset | Analysis |
|---|---|
| "Prices are in Kenyan shillings" |
|
| "*The percent change from \(\mathrm{P_0}\) to \(\mathrm{P_1}\)" |
|
| Table shows 13 companies from 1994-2008 |
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| Underpricing ranges from -1.41% to 236.13% |
|
| 7 IPOs occurred in 2006-2008 |
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| IPO prices mostly between 9.5-11.9 shillings |
|
Summary: The table provides concrete evidence for the research findings, showing 13 IPOs with extreme underpricing variation (-1.41% to 236.13%) and over half occurring in 2006-2008, confirming both the sparse activity and systematic underpricing patterns.
Overall Summary
- The Kenyan IPO market (1994-2008) exhibited highly unusual characteristics that challenged conventional IPO theory
- Despite minimal activity (only 13 IPOs in 14 years), the market showed extreme underpricing with first-day gains ranging from -1.41% to 236.13%, averaging around 50%
- Traditional factors like investor sentiment and board prestige surprisingly showed negative correlations with IPO prices
- The market appeared to be rapidly developing, with over half of all IPOs occurring in just the final three years (2006-2008)
- This suggests an immature but evolving market where companies consistently left substantial capital unrealized through severe underpricing
Question Analysis
The question asks why the passage mentions 'board prestige' when discussing the Kenyan IPO study, seeking to identify the primary purpose of this reference.
Key Constraints:
- Must identify the PRIMARY purpose of the reference
- Focus on why board prestige specifically is mentioned in the context
Answer Type Needed: Purpose/rhetorical function identification
Connecting to Our Analysis
The analysis shows that board prestige was one of four variables studied, and the source reveals it unexpectedly showed negative correlation with IPO pricing, surprising the researchers. The analysis contains all needed information about board prestige's role in the study to answer this question completely.
Extracting Relevant Findings
From the analysis, board prestige was one of four variables researchers hypothesized would positively correlate with IPO pricing. The researchers expected board prestige to increase IPO asking prices, but the results were contrary to expectations.
Individual Statement Evaluations
Statement 1 Evaluation
Statement: "help explain why investor sentiment toward some firms is sometimes very low"
- Analysis: This misrepresents the variable's purpose as board prestige wasn't used to explain investor sentiment
- Issue: Board prestige explaining sentiment differs from the study's actual focus on pricing effects
- Conclusion: Does not match the primary purpose
Statement 2 Evaluation
Statement: "caution that some variables should not be considered accurate predictors of IPO prices"
- Analysis: This focuses on implication rather than primary purpose
- Assessment: While it presents a cautionary message about predictors, the study found unexpected results but wasn't primarily cautionary in nature
- Conclusion: Secondary rather than primary purpose
Statement 3 Evaluation
Statement: "introduce one of the variables whose relationship to IPO pricing surprised the researchers"
- Analysis: This perfectly matches the passage's emphasis on surprise
- Evidence: Board prestige serves as an example of surprising findings, as researchers were 'surprised to find' negative correlation instead of positive
- Alignment: Directly matches the passage's focus on surprising results
- Conclusion: Matches the primary rhetorical purpose
Statement 4 Evaluation
Statement: "point to one of the attributes firms often used to generate investor interest in their IPO"
- Analysis: Claims firms used board prestige to generate interest
- Evidence Check: NOT supported by the passage content
- Conclusion: Does not align with the study's focus
Statement 5 Evaluation
Statement: "demonstrate that some attributes of a firm are often negatively correlated with the firm's IPO price"
- Analysis: Focuses on demonstrating negative correlation
- Assessment: True but not the PRIMARY purpose
- Conclusion: Secondary finding rather than main rhetorical function
Systematic Checking
Checking the remaining options against the passage context:
- The word 'surprised' in the passage is key - it signals the primary rhetorical purpose
- Board prestige is grouped with investor sentiment as both showing unexpected negative correlation
- The emphasis throughout the analysis is on the unexpected nature of the findings
- The primary function is to illustrate surprising research outcomes, not to explain specific mechanisms or provide warnings
Answer
introduce one of the variables whose relationship to IPO pricing surprised the researchers
This answer captures the primary rhetorical purpose of mentioning board prestige in the passage. The mention serves to introduce board prestige as an example of the surprising findings that emerged from the Kenyan IPO study, where variables that researchers expected to correlate positively with IPO pricing instead showed negative correlations, contrary to their hypotheses.
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