Lets Talk About Scheduling

Hey everyone!

This week's blog post involves setting up my research schedule and discussing the data analysis techniques within my study. So, without further hesitation. Here it is:

January 16th-23rd: Compile data on all NASDAQ companies in the industries that Yelp, Facebook, LinkedIn, Twitter, and Tencent Holdings Inc. are in. Begin separating data based upon the different financial variables I will be analyzing in the study. These financial variables are based upon the multiples I have decided to use within my study.

January 23rd-30th: Finish separating and entering data on different financial variables into Excel. Write R program that parses the excel data to find comparable groups for the firms I plan on analyzing in my study. This is done with a technique implemented by a research study on biotechnology firms. To find a group of comparable firms for a particular company the study groups all firms in the companies industry into nine portfolios, sorted based on total assets and EBITDA, which is essentially earnings less any operating costs. The portfolio matching the company being analyzed is used as a comparable firm group for the company.

January 30th-February 13th: Perform all projections and error estimates for each multiple and method, recording the data in an excel spreadsheet. This is the bulk of my research and where the method section is implemented. As my entire research is essentially data analysis, the data analysis section is mostly integrated into this period of time.

My methods are detailed as follows:

I will use a linear approximation of price using a comparable multiple. This multiple will be determined in three different manners: using a harmonic mean, mean, and median of the comparable firms from the comparable firm group.

I will record the over or underestimation of the estimate price from the actual price of the IPO for each firm and each method. Ultimately, this allows me to compare the error terms more efficiently.

February 13th-20th: I will finish analyzing the error terms and make conclusions based off of the values I receive. I will compare multiples across different methods, determining which multiple was the most effective overall in valuing a firm as well as which method provided the most accurate results. This will be done by averaging errors in different cross-sections and comparing their values. The smallest errors for each section I analyze will represent the most optimal multiple in this circumstance.

After this is done, I will begin drafting my paper, including the results, conclusions, and future implications of research section. I will also begin compiling tables based off of the data analysis I will have conducted.

So that's my plan for my research! If I stick to it I'm sure that I can produce an incredibly high quality paper. (458)

Akash

I can't sing... or Pitch

Hey all,

Here's a video I made about my research. Overall, I feel like it was worth the effort.

Akash

Method Madness

Well, our methods assignment was due today, and the good thing is that I have never felt so good about most of my methods!!! Hopefully the feeling will stay with me throughout the rest of my research project.

After looking at various other research papers, I am particularly confident, as I was not before, with the statistical analysis that I will be performing on the comparable firm firms as well as the sample limitations that I must justify within my methods. The statistical analysis of the different comparable firm multiples, as I found out, is implemented through two closely related methods in the literature. The older method estimates price base off of a slope-intercept type equation, disallowing any y-intercept, with the slope as the comparable multiple. This method is "old" because in order to estimate the comparable multiple in the first place, it uses a mean or median estimate of the multiple based off of a company's comparable firms. This essentially means that comparable multiples for "similar" or comparable firms are calculated and used to determine the multiple for the company being analyzed. The newer method, instead of using mean or media, uses a harmonic mean estimate for the multiple, claiming that studies have shown the harmonic mean method to work more effectively. A harmonic mean is essentially an inverse mean of inverses, so essentially the entire equation for the mean is "inverted twice" to achieve a harmonic mean.

The second thing I am fairly confident about is limiting my sample within my methods for validity precautions. Because the validity of a sample is essential in data analysis (because it can potentially skew results), it is essential to provide a systematic way of limiting the sample. In the context of my research project, this means providing a systematic way for selecting comparable firms for a firm I want to analyze. Luckily, I found a good study done on biotech IPOs that showed me an efficient method of finding comparable firms. Essentially firms in the industry are divided into 9 classes based on their total assets and EBITDA, a financial variable for a firm. Then, the firm being analyzed is classified in the same manner, and once in the specific class, certain firms having the closest total assets as the firm are chosen as comparable firms. Doing so ensures that the best, most representative firms are picked each time.

One part of my methods that I am somewhat unsure about is which multiples to use within my research. There are several different multiples and narrowing these down is difficult. Although one source I was reading did provide me with a starting point, by looking towards those most commonly used in practice and academia, I still have a long ways to go. I am currently reading a source describing certain multiples based off of financial variables as well as their uses. This will help me in this part of my methods. However, because non-financial variables may also play a large role in valuing social media IPOs, I don't want to discount these and need to find a way to include these as well. I anticipate most of the coming weeks to be concerned with this issue in particular.

I'm constantly thinking about these problems, but at least thanksgiving is here so I can gorge myself with Turkey!! See you next week! (560)

Akash

The Meat of The Matter

Well, Trimester 1 has finally ended, and that means that I can finally stop being productive! (Just Kidding).

Onsets of Senioritis aside (JK), this Trimester is going to be LIT, and even more so than our Lit reviews. I'm really looking forward to crafting my methods and actually getting into my research!

The last couple of weeks have been especially hectic, but I'm happy to finally write blog posts again.

I learned A LOT in the past trimester, and looking back I can't believe how much my project actually changed. I went into the class only knowing that I wanted to analyze stocks through different valuation methods, and now my project has become far more well-defined. Most of the trimester was spent learning everything that I could about stocks and the way investors valued and priced them. I learned about intrinsic valuation methods and comparable firms approaches, the drawbacks of each approach in different situations, and how they were actually implemented. I managed to focus on the Social Media industry, and (thanks to some lucky timing), a specific event that would give my research increased context (the future IPO of Snapchat). More importantly than everything I personally learned in just raw information, I learned to actually explain my area of research clearly and concisely, so that any person who could read my paper could understand it with the definitions I presented. I think the biggest problem for me was this, and usually I would resort to using general, meaningless phrases to attempt to convey meaning to certain explanations. Mostly, though, it just came out as useless information. Revising this information truly helped me grasp my topic better and fully understand the material that I was working with. Now I can clearly explain to someone that because intrinsic valuation methods use inaccurate models to predict financial variables, which are difficult to predict in the Social Media industry itself, the comparable firms approach to pricing social media firms is more effective.

So thank you Mrs. Haag for working this through with me and not getting mad at the numerous morning meetings that I held with you!

Looking into the future, I need to figure out the methods with which I am going to conduct my analysis. I know I need to do a quantitative analysis, but I am unsure over how to justify which specific comparable firm multiples to use, because in the literature (from my point of view), it seems like the justification for the multiples used is rather arbitrary. Additionally, in the methods section of several other papers that I have read, papers tend to exclude several companies or general data points from their analyses (I'm not fully remembering which ones), and I need to mimic these provisions for testing the accuracy of comparable firm multiples as well in my study.

Anyways, that's what the future of my methods section holds (or at least what I think it holds). Hopefully, it works out like I'm hoping college apps will! (504)


Akash

Feeling Kinda Weird

Well, another week has gone and my Lit Review Outline is in a pretty weird stage: I'm having difficulty figuring out how to open my paper: I think I have a solution though, and I need to talk about it with someone this week.

Anyways, I need to come clean about my feelings this week, so lets get into it before I think too much.

So on thing that I'm feeling really good about is actually choosing the companies that I want to analyze for my research. I figured out that I'm going to look at 5 companies, which essentially compromise the main area that I am planning on looking at: Social Media firms with largely user-based revenue platforms. After cross-referencing two Indexes, the Solactive Social Network and Solactive Social Media Indexes, I found that companies that appeared on both were: Facebook, Twitter, Yelp, LinkedIn, and Tencent Holdings. This last company may seem out of the ordinary, but it actually runs WeChat, the largest and basically, only, social media site in China. These companies are very similar to one another, and I think that they are really a logical choice to use within my research.

One thing that I'm feeling a bit eh about is picking the specific valuation models for my research within my method. There are a TON of different papers booing some models and praising others, even in the specific area that I am looking in, so I need to do a lot more work on justifying my choices. Right now, I could possibly consider using what an old study on valuing IPOs did in the late 1900's, but I feel like this might have limitations as well, given that it is really old. Maybe I could combine more modern sources, but generally I don't have the clearest idea of which models I will chose. Ultimately, though I don't think it will be the BIGGEST problem, probably a slightly minor bump.

The biggest problem I have in my research is going to be justifying my analysis method and doing some of the stats in the project. When I read some finance papers, I don't understand certain statistical justifications that they use. Like I saw a word called "endogeneity", and had didn't know what it meant. Luckily now, I know it means being affected by outside factors, or outside influence, but the point is that I must read a few statistics papers before beginning my project. Although this is a lot of work, I'm still sure I can pull it off. The good thing is, though, that I understand most of what the major analysis of the project is about.

Well, that's all folks! Hopefully I'm not in way over my head! (470).

Akash

Questions, Questions, Questions

Hey, Everyone! The Annotated Bibliographies are FINALLY done!!!!! Now its time to talk about research questions, and justifying them.

I narrowed down my research question a bit more from the outline from last week. Basically, I'm asking: Post IPO, which comparable firm multiples are most effective in valuing Social Media Firms on the Solactive Social Media Index, and does the Price-Earnings Effect still hold in this market?

Scope: I have narrowed my scope in multiple ways. The first means in which I have narrowed my scope is by looking specifically towards the Social Media Market, and social media firms following their IPOs, when they are first traded publicly. Since I can't look at every Social Media firm that has ever been traded on the stock market, since I would have no means for choosing firms, and because of the large number of them, I am looking towards the firms on the Solactive Social Media Index, which is essentially measures the value of Social Media stocks. This index, as according to one of my sources, is largely considered the most extensive and appropriate means of looking at Social Media firms. Ultimately, this specification allows me to spend more time researching the significant aspect of my area of inquiry since I do not have to spend time worrying about which Social Media Firms to look towards. The next specification in my scope is looking towards specific valuation models and stock market effects associated with it. I specifically look towards comparable firm multiples, which are essentially ways of assigning worth to a company relative to similar companies in the industry. Looking at this model and the Price-to-Earnings Effect gives my research more specificity, but also allows me flexibility in choosing models. The ambiguity of the "comparable firm models" is intentional since I cannot, right now, project how many models I will look at. This allows me to experiment with only a few or many models, depending on how long my research actually takes. Finally, the Price-Earnings Effect is used to act as an interesting and important addition, since the effect is fundamental in finance and deserves to be studied. Furthermore, there might be an instance in which the comparable models produce no significant information whatsoever, as one of my sources implies might be the case, so this source provides an extra outlet for my research.

Key Terms: I have quite a few key terms in my definition, all of which will be defined as they naturally appear in the literature review. The definitions that I use and discuss are commonplace in academic journals, so I can justify the validity of the definition through various professors that write about them. The first key term is IPO. This just stands for Initial Public Offering, and is just when a company first sells it stocks to the public, and begins to appear on the stock market. Thus post IPO is looking at the time after a firm goes public. The next key term is comparable firm multiples. As explained previously, in finance firms are valued to assess their worth using models. A Comparable firm multiple is a number associated with some aspect of a companies financial situation that is compared with numbers of the same multiple from other similar firms in the industry to see whether the company in question is worth more or less relative to the other firms analyzed. A financial index is essentially a measurement of the value of a specific industry, or section of the stock market. It contains firms highly representative of the industry of the index. Finally, the Price-Earnings effect is a financial phenomenon, where firms with a low stock price to finance Earnings-per-share ratio perform better than firms with a higher value of the same ratio.

Because my research is testing to see whether certain fundamental financial phenomenon and measurements appear in the Social Media market, my question only assumes that the comparable firm multiple can be applied to Social media markets. Even this, however, is a loose assumption as if I find that the results are insignificant, the conclusion of my study will be that the multiples cannot be applied to the Social Media market. Essentially, because my research tests whether certain assumptions are true in the first place in the Social Media market, no aspect of the question should rest on unsound logic.

Variables: The primary variables in my question, which I can adjust, are the comparable firm multiples that I ultimately decide to use to test my research question. Foreseeably, I may slightly modify my question to analyze choice firms in the index, and in this case, specific Social Media firms in the index to analyze in my research question would also be variables.

Researchability: I envision myself looking at the past data of the Social Media firms on the index and performing calculations using the comparable firm multiples to predict the future price or other financial variable of the firm, and comparing it to the actual value at a certain date. After calculating residuals and percent errors, I would be able to determine which multiple would statistically perform the best in the market. Following this, I envision myself analyzing the firm, similar to other researchers I have read, with the Price-Earnings ratio to determine if the Price-Earnings effect still applies within the Social Media Market.

Gap: The gap in my research is twofold: one, according to one of my sources, Social Media firms and their IPOs are substantially different from other firms and IPOs, making them a particularly interesting and important subject to study. Second, and more importantly, the Social Media market has not been analyzed AT ALL in modern finance research, and due to the increased success of these firms as well as their unique qualities, as explained before, there is a natural gap to research whether fundamental questions, such as the best way to value a firm, apply and can be answered in the Social Media market. Essentially, there has only been one finance paper on Social Media firms, describing their characteristics and relative performance. My research, as I explained earlier, begins to test whether as analysts, we can make assumptions about the Social Media market like we do of other different industries.

Significance: Firstly, Social Media is growing in popularity and size, so it is already important to look at what makes a Social Media firm successful for a prospective modern investor. Taking a more nuanced approached, I am looking at Social Media IPOs, and determining whether early on, a multiple can value the firm accurately. In the modern day, IPOs are of increasing relevance due to the increasing number of startups wanting to perform IPOs to gain more funds. Thus, the research into Social Media IPOs gives insight into valuing young, growing IPOs in the modern world.


OMG. I'm so sorry for that SUPER LONG POST, but I had a lot to say. (1,113)

Akash

Toeing the Outline

Another drama filled week has come and gone, and I'm starting to look at even more specific sources for my research study. The big drama in the coming week is if i'm ever going to be able to decipher a research paper that is super useful to my methodology, but super esoteric for me right now.

Anyways, as annotated bibliographies are due in the coming week, and the ever present literature review makes itself moe prominent, it's time to create an outline for the literature review. If you didn't remember, my subtopics were (change a bit since I shifted my topic a little): Industry Analysis, Valuation Technique Analysis, Comparable Firm Multiple Application.

Subtopic 1: Industry Analysis
The basic premise of Finance, and analyzing the stock market is to be able to determine how a firm is performing, and in turn, whether to invest in it. It is essential to first narrow down the focus of the literature review to a specific industry sector of finance, or a specific type of event in finance, since if we looked more generally at every industry, we often wouldn't be able to draw conclusions based on the incredibly diverse nature of different institutions and sectors.

• Batov et. al shows the vast differences in how Internet and Non-internet firms work. When looking at the value of non-internet versus internet firms, it appears as though non-financial variables play a much larger role in determining the value change of an internet firm as opposed to a non internet firm

Premise 1: There is an increase in personal startups throughout the country

Premise 1--> Conclusion 1: An increase in succesful companies can be expected within the future

Premise 2: Succesful companies want to become more profitable

Premise 3: To become more profitable, an increase in capital funding is needed

Premise 4: IPOs provide capital funding for companies

• IPO: Initial Public Offering is when a company first offers its shares to the public, and allows itself to be traded publicly on the market, allowing the company to gain capital when shares are first bought for the company

Conclusion 1+Premise 2,3,4-->Conclusion 2: IPOs are bound to increase and become more important in the future. They are relevant.

Counterargument: Private equity funding for startups is also an option, and also avoids litigation that IPOs have to go through. This could also be popular

• Even if is popular, it is difficult to study this, as private equity funding means that companies are not required to release financial statements, etc... Even if were to increase, would be of no use to us

Premise 5: Many of these new startups will be tech-oriented startups

Premise 5+Conclusion 2--> Conclusion 3: Tech. IPOs are bound to increase in the future, and become more relevant to society. 

Premise 6: IPOs carry many anomalies associated with them

• Ritter and Rajan both note that IPOs are underpriced relative to their first day closing market price. Something which is odd, considering that underpricing the IPO causes a decrease in capital funds for the company issuing the IPO in the first place.
• Zheng and Ritter disagree that IPOs underperform after they have initially taken place. Zheng argues that after accounting for several financial variables, and comparing the IPOs to other growth matching firms, they did not appear to significantly underperform, as Ritter claimed they did (Ritter claims that their return on equity (total investment) is lower than other firms in the same industry).

Premise 7: The Causes of these anomalies, as well as their impact on the industry market for the IPO are debated even today

• Damodaran and Ritter have differing views of valuation models that can be used for IPOs valuation. Researchers Fama and French revised a previous model to a newer model in 2014 to include additional factors when valuing young companies, typical in IPOs.

Premise 6+7--> Conclusion 4: Research concerning IPOs is up till now incongruous.

Conclusion 3+4--> Conclusion 5: Tech IPOs are an interesting area to focus research on

*I need to find additional reasons for narrowing tech IPOs down to Social Media IPOs (perhaps the increased prevalence of them, as well as the additional anomalies that they possess over other internet/software IPOs in addition to the fact that they are not really researched at all).

Subtopic 2: Valuation Technique Analysis

After focusing on the section that I will analyze, I need to answer what I will do in that specific section. The principal question of finance is, as stated before, how much is a company worth, and is it worth investing in? In order to determine this, individuals attempt to value companies using different techniques, which I discuss here.

Premise 1: There are two different types of valuation techniques: Comparable and Intrinsic

• Definition: Comparable Firms Approach attempts to use certain financial variables, indicative of a companies performance, to compare a companies value to other values within the industry, and determine if a company is overpriced or underpriced relative to other companies witihn the industry
• Downsides (Damodaran): Does not determine if the company is an "absolute" good investment. Other companies in the industry could have inflated prices as well due to, as Rajan puts it "overoptimism"
• Definition: Intrinsic Valuation attempts to determine the "true worth" of a company through a multitude of methods, more objective than looking only at the specific industry the company is in
• Looks at financial variables such as risk, and the amount of expected cash to be received in the future (future cash flows). Will describe Discount Cash Flow Model: Where the amount of money expected in the future is "discounted" at an interest rate to a present value, which is the calculated present value of the stock.
• Drawbacks: Hard to determine the future value of a stock (Ritter)

Premise 2: When analyzing Growth firms, intrinsic valuation models tend to fail

• Growth Firm: A firm whose value is primarily placed on how much it will grow/ expand in the future
• Damodaran/ Ritter: Both authors, in their individual research papers argue that because growth firms do not have much historical data pertaining to their finances, it is difficult to predict what future cash flows could be

Counterarguments: Damodaran argues that comparable multiple firms have many of the same issues that intrinsic valuation models have, and that they rely on the same fundamental assumptions. This could be problematic since often growth firms don't have the same business plans, making comparison in cases with little comparable firms difficult and inefficient. Liu et. al also backs this up, finding that many of the dot-com companies had horrible valuations when using comparable multiple valuation methods

• My response does not have full sources yet, though I would suspect that I would find a source discussing how many Social Media IPOs are venture capital backed, and that they would not really issue an IPO unless they were already succesful, which would nullify any of the arguments made by Damodaran and Liu et. al because they apply to incredibly young firm in the first place.

Premise 1+2-->Conclusion 1: It is best to use a comparable firm approach to valuing Social Media IPOs.

Subtopic 3: Comparable Firm Multiple Application

Now that I have narrowed down the topic to valuing Social Media IPOs with a comparable firm approach, we need to find a specific focus with which to apply the multiples in order to arrive at a research question.

Premise 1: There are common anomalies associated with the Price/Earnings multiple outside of IPOs

• Anderson explains the fact that stocks with low multiples tend to overperform stocks with higher multiples over the long run. He suggests a method for recalculating Price/Earnings to strengthen this effect

Premise 2: This effect has not yet been researched in in the context of Social Media IPOs

Premise 1+2--> Gap 1: Does the price to Earnings effect take place in Social Media Firms following their IPOs?

Premise 3: There is disagreement over the best multiple in different industries

• Gray et. all and Dittman disagree over the most overall effective valuation method. Gray et. al claims it as Total Enterprise Value/ Earnings before taxes..., while Dittman claims it as the Price/Earnings Ratio.

Premise 4: The Price/Earnings Ratio is more effective in valuing IPOs using forecasted earnings rather than historical earnings

• Studies by Moonchul et. al and Liu Jing agree with this, and it is generally agreed upon in the industry

Premise 5: Neither valuations have been performed on Social Media IPOs

• Bring up how Social Media IPOs are different enough from normal IPOs to warrant an examination of this

Premise 3+4+5--> Gap 2: What is the most effective variation of a multiple to use when valuing Social Media IPOs, and does trailing earnings ever become more effective than forecasted earnings in valuing a Social Media Firm.

Research Question: Post IPO, which comparable firm multiples are most effective in valuing Social Media Firms, and which anomalies still hold in this market?

WHOOOOOOOAAAAAAH

THAT WAS LONG. Hope you're still with me! (1485)

Akash

Thigh Gaps don't matter, but Research Gaps do

Well, another week has passed, and the idea that I have for my research topic is definitely solidifying. In celebration of this (clearly amazing, awesome, unparalleled) achievement, I'm bringing in two homies from my sources to explain how my research is totally unique and dope.


Jay Ritter: Yo dawgs, my name is homie Jay Ritter, but you can call me Jay R. My partner Kim Moonchul and I did a 1999 study on valuing IPOs using standard comparable firm multiples, like Price to Earnings Ratio and Book to Market Ratio. Basically, we found that although the multiples didn't perform that well in general, using forecasted earnings to value IPOs was waaaaay better than using trailing earnings (historical data) to look at IPOs and attempt to determine their value. Our data looked at A LOT of Software IPOs and Non-Software IPOs, but we didn't really look at any Social Media IPOs because, Guess What? they never existed, so if you're gettin' what I'm puttin' down, and Social Media IPOs are actually different than Software IPOs in a more general way, it could be totally cool to see if the measures we used can be better applied or are generally worse.

Piotr Wisniewski: Yooooooo FAM!!!! I Gotchu!!!!! Guess what Mr. Ritter, the clearly gaping hole with your study in the context of several modern IPOs is answered. I did a really short research project in 2014 on Social Media IPOs and why some of them were successful and others weren't. But guess what???????  I also talked about some differences that Social Media IPOs have to normal IPOs. Social Media IPOs are valued sooooo much more pre-issue relative to their first day closing market price than other IPOs. This means that from the start, there's something different going on with investor sentiment and demand with Social Media firms. In the long run, it seems, like other IPOs, that Social Media firms tend to be overpriced, but unlike other firms, THEY ARE ACTUALLY BEATING THE MARKET. That means that traditional valuation measures for firms might be more effective and telltale of Social Media firms, just by the nature of how these companies invent. A question that could naturally arise out of this is: is forecasted earnings still more effective than trailing earnings? This would intuitively make more sense as these companies are primarily growth centric, but how does this actually play out. Also, if this is the case, at what point (if any) does valuation using trailing earnings become more even or more effective than valuation using forecasted earnings? This could be REALLY USEFUL, because this change seems to suggest a shift in the maturity of the Social Media firm, from primarily a growth firm to a more mature firm. THIS COULD BE HUUUUUUUGE.

That's where my topic and research area comes in: looking at Social Media IPOs and determining whether the valuations like Jay Ritters still work with Social Media IPOs. I came up with the last part of looking at if there is a point at which forecasted earnings become less of a value predictor than trailing earnings for Social Media Companies after watching a few lectures by an NYU professor (Aswath Damodaran) on corporate finance. This topic is getting more interesting by the day, and I really think I have an interesting, rich research area. (552)

Peace Out,

Akash

A Totally Lit Review

So another week has passed, and I have finally found my research topic. It is going be looking at assessing the effectiveness of comparable firm multiples in valuing Social Media IPOs. The good news is that all of the research that I have done before arriving at my final topic is still completely applicable.

After talking about the Literature Review in class on Friday, I felt soooo much better about what I needed to do: I needed to:

1. Prove that I wasn't any joe schmo in the field
2. Establish what has been done on different areas of my research area
3. Show how my research contributes and answers an essential gap in what has been already been done

Based on these goals and my findings prior to this post, I expect to begin my literature review with a general description of what an IPO is, the importance of an IPO to a firm, and the different stages before the initial offering of an IPO. From this last part, I will begin to introduce anomalies in the IPO process (such as underpricing), which will naturally lead me to discuss the general underperformance of IPO's in the long term, as this is an anomaly that often occurs after the public issuing of a firms stocks. Following this discussion about IPO anomalies, I will discuss whether these things have any explanations, or possible factors which can aid in our understanding of them. From there, I can introduce the concept of firm valuation, and how when we value a company, we connect things that we already know about the company to future expectations we have about the company. This naturally leads into a discussion of what valuation techniques have historically performed the best, and in which scenarios the techniques have not been thoroughly tested in. This would lead me to a discussion of IPOs, and more specifically looking at the Comparable Firm Approach for valuation. From here, I can justify why I need to specifically look at Social Media IPOs, and then begin to pose a research question and reveal a gap in this area.


One Source that is profoundly important in my literature review and my area of inquiry is a source by Piotr Wisniewski. The source discusses Social Media IPOs, assessing the viability of a Social Media firm to conduct an IPO. This source is fundamental to my area of research since it explains much of the uniqueness behind Social Media IPOs, compared to non-technology IPOs and internet, software IPOs as well. For instance, Wisniewski notes how many Social Media IPOs are relatively overpriced as compared to other IPOs in the same industry (something remarkably different due to the general trend of underpricing for IPOs). Additionally, Social Media stocks tend to be relatively overvalued compared to the market and industry average, but unlike most IPOs, also outperform the industry and market average. This provides key insight into the differences between Social Media IPOs as opposed to other IPOs and is essential in establishing the gap in the research for the literature review. As many other sources typically discuss the long-term outlook of underpriced IPOs, as well as the valuation of these IPOs, it will be incredibly fruitful to see if the effectiveness of valuation techniques changes when looking at IPOs that have radically different initial valuations and short-term performance as compared to other IPOs.

(624)

Signing off,

Akash

Sum Subpar Subtopics

Well, another week of AP Research has passed, and the task at hand seems as daunting, if not more so, as it did a week ago. This week, I spent time reading part of a book on valuation models, another article that is verifying the area are of research I want to go down more, and finding some other articles about possible industries that would be interesting to analyze. Taking some suggestion from Ved, I found that IPO's are a really promising industry to examine: a lot of conventional methods of valuing stocks break down, and modifications have to be made to existing them in order to apply them to IPO's.

Anyways, research crises aside, I need to begin partitioning my topic into subtopics for my literature review. At this point in time, the literature review seems like a thing I will use for narrowing down my research to a specific valuation model and for exploring areas in which my specific valuation model has never been applied in, or generally fails to account for. These give a few natural subtopics for me to talk about. The first, and most general, is just valuation models in general. In the future, and for the purpose of the literature review, I will discuss a single model, justify why it must be looked at, and proceed to investigate/ analyze areas in which it can be applied. For now, however, I must look at various valuation models holistically: what do they measure, what literature is on them, etc.. In the process of doing so, I can come to a more specific or academically "rich" model to examine. Currently, the model that I am looking at, and which I seem to be leaning towards is the Price/ Book Value valuation technique. Having done more research on this technique, it seems as though a gap in regards to how it can improve value premiums, similar to study I read by two researchers in 2005 who examined increasing the value premium for the price/earnings ratio. The next subtopic would be a general historical context for how different models has been applied when valuing stocks, and what modifications of the model have been applied to different scenarios. This has the great benefit of allowing me to focus on a particular scenario that the model has never been applied to, or a modification that has never been attempted for the stock. Attempting to find a way to modify a technique necessarily requires that it fail/ underperform in certain scenarios. This leads me to my third subtopic: documenting common scenarios/ conditions under which valuation techniques and models fail. This will aid me in further refining my research method, since I would have a better idea of where to begin modifying the technique that I would have chosen. Finally, every technique has to have a context, and be tested against certain data. Because of this, my final subtopic needs to be on industries in which the valuation method is not frequently used (if I want to introduce a new method/ improvement for applying the technique), or is frequently used (if I want to improve upon a pre-existing method). This is where Ved's suggestion comes into play. Frequently, IPO financial data previous to their initial offering date is not available. This means that many techniques fail, and need improvement when being applied to IPO's. My research, specifically, seems to be going down the route of improving Price/Book ratio in the valuation of IPO's. As I read more about how other models have been modified when being applied to IPO's, I'll be sure to amend my topic and research area. For now, I just have to keep reading. (616)

Cheers,

Akash

Finally a Topic!!!!! (Kind of)

Welp, It's been a week and I've come a lot farther than I actually imagined I would. I actually have a topic now!!!!!!!!

Well, kind of. I know the general direction to look into at least. After my creative barf session last week and reading some of the comments left by other people in the research class, I realized that I should continue pursuing a project in finance along the lines of analyzing stock valuation measures.

But how? After looking through google scholar, I depressingly found a study from 2012 that essentially conducted the exact study that I had thought of. So that idea was out the window... After searching more through google scholar as well as Columbia and Wharton Business Journals, I found a path that was promising: improving stock valuation measures. To those that are reading this post right now, the topic might seem like another huge open area, but I've done some more research and found some possible leads into what I can do. I found a 2005 article titled "The Long Term Price Earnings Ratio" by Kieth Anderson from the University of Reading. In the study, Anderson managed to improve the incredibly common price/ earnings ratio, a valuation measure commonly applied to stocks, by simply managing to extend the measure of the companies earnings over long-term periods rather than short-term periods. Using this, Anderson attempted to explain the reason for the Price/ Earnings effect, a common effect in finance where stocks with lower price/ earnings ratio (value stocks) generally outperformed stocks with higher price/ earnings ratios (growth stocks) over the long term. A similar measure to the price /earnings ratio, the price / book value ratio, holds similar anomalies as found by Fairfield and Harris in 1993. This could actually lead me to a highly specific topic on applying a method similar to Anderson to the price/ book value to test whether the measure could be improved. In the coming week, I plan to perform more research upon the prevalence of analysis on the price/ book ratio in finance literature. Another possible lead, which is less developed that I am looking into is the CAPM, capital asset pricing model. Essentially, the model claims that riskier stocks that outperform risk-free stocks due to higher market volatility (beta). However, in a study done on this, over a long term period in the 1970's-90's, it was determined that beta was not a substantial reason for why these stocks outperformed risk-free stocks. I have not read much literature on the CAPM, so in the next week I should read more into this to test if improving the CAPM is a viable option.

For now, much of my work in parsing through the literature is determining an appropriate stock valuation method to improve, and once doing so, what aspects could possibly be troubling for the valuation method. In this avenue, I am looking at two papers by researchers Fama and French, which appear to be fundamental to the entire discussion that I am about to engage in. I will read these papers first thing in the coming week, and hopefully be able to focus my search on improvements in valuation methods further.

Going forward, I plan on searching different business journals, JSTOR, EBSCO, and google scholar for more finance articles pertaining to specific valuation measures, and ways to improve valuation measures. At this point, the purpose of my literature review seems to be establishing a valuation measure to analyze and an aspect of the measure to improve upon. Based on this, I can find articles more pertinent to the ideas I have expressed before, and more that are circulating through my head. Once I have read an article, I will go through any cited sources that are of interest and need to me, and in such a way, I can finally begin to construct a solid research topic and question.  (648)

Signing off,
Akash

Yay Research?

As I sit here typing up my first post, recovering from a five-week ramen-induced coma, I am beginning to realize that I only have an inkling of what I want to research about, so apologies if this post comes across as scatter-brained.

Going into AP Research, I have a few goals that I expect to complete for the class. First, I want to be able to develop my knowledge in a field that I already have a passion in. By this I mean that I want to begin to specialize in areas that I have already spent numerous hours at home and at school studying, and otherwise reading into, not a topic that is completely new and foreign to me. Second, I want to produce a complete, tangible result, which I can use to develop further connections and research opportunities. I recognize that finding a topic for doing such a thing would very likely be difficult, as results of the latter nature usually require years to successfully produce. Nevertheless, I believe that choosing a basic aspect of an unanswered or deep question of a particular field, could prove fruitful when going to college. Finally, I look forward to creating something with "real world applications". This "R" word that seems to be as ubiquitous in research proposals as stuffed animals on my bed, doesn't really take on the same meaning here as it does in other places. By real world applications, I mean something which I can use to build on in the future. "Real" in the sense that I would be able to refer to it later and build upon fundamental ideas expressed within it.

As you may have already guessed from my overly generic and unfocused view in this post, I really don't have much of an idea of what I want to do. Having just returned from math camp, I may look into Ramsey Theory, a topic which I covered extensively during the camp, and may end up working on later this year, aside from my AP Research topic. A large problem with mathematics in general, however, is its abstracted nature. Without any solid application to cling to, mathematical jargon can quickly become overwhelming, even for people who study math extensively, but have no knowledge in a specific field. Ramsey Theory may provide more application than most fields of math, as many arguments are based upon the coloring of certain sequences, but I would have to spend more time working out particular details of the simplification process. Another avenue of research that I could look into is stock valuation methods of companies during the great depression and the great recession. Using data (which I could obtain from a contact that I have in ASU), I could compare different valuation models for companies during the great depression/ great recession. After doing a quick search of the topic, I could not find any immediate results for a comparative analysis of the great recession/ depression. Using different valuation techniques, I may be able to suggest, at least in a very simplified manner, a preferable hedging strategy during recessions, or perhaps more generally, bear markets. Finally, my most general idea involves analyzing algorithms for stock trading, or perhaps more tangentially, refining search algorithms for determining ramsey numbers, or finding stronger upper bounds for them.

What is stated before is more or less a giant mental mess of the ideas that have been running through my head for the last few days, and about a week before. In the coming week, I hope to refine my ideas, narrow my choices to one topic, and begin exploring the topic literature for my area of inquiry. (611)

Jet-Lagged and Back from China,

Akash