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