Introduction
Following the final examinations you have to undertake two research projects to complete the requirements for the award of the M.Sc. degree. The projects normally have to be completed over the summer semester period starting on Monday 20th May 2024, but if you have to complete resit examinations appropriate adjustments will be made to the time period.
You are required to complete one empirical study on a set topic and either project 2 (financial analysis of a company) or project 3 (subject of your choice). The data for the first empirical study is provided for you, and if you elected to complete project 2 you have already selected your company. Introductory sessions will cover the basic elements of the questions/issues you will be expected to address and the methodology you will be expected to employ. The requirements for the third projects will also be discussed, but as there will be considerable variation in the topics being addressed it is anticipated that appropriate approach to be adopted will depend in part on the topic.
The projects will be completed the supervision of:
These members of staff will provide an introduction to the projects as well as continuing advice and direction over the twelve week period. Tutors will also be available to provide additional assistance for project 1. No tutors are required for projects two and three.
The details and requirements for both projects one, two and three are included in this handout.
The time period for the completion of the projects is relatively short and anyone experiencing any difficulties should discuss these with the relevant project supervisor. Barbara Baillie will continue to be available to discuss any non-academic problems that might arise over this time period. If you intend being away from the University for more than a few days, you should inform Barbara, specifying the dates and contact details.
General Guidelines
For the empirical project you are required to prepare project reports of approximately 5,000 words however, a good project would be expected to extend to 8,000 words. The reports should be typed and include tables and graphs where these are relevant (the tables, graphs and bibliography are in addition to the 5,000 words). The project report should explain clearly what you have done, your motivation in doing the analysis in that particular way, what your results mean, what are the limitations of your results, and further work you would have liked to have undertaken given more time. The third project is less structured, and within certain constrains you can choose the topic. Projects two and three should beat least 8,000 words long, plus tables, graphs and a bibliography. You will be assessed on presentation as well as on content.
The empirical projects will start with lectures on research methodology appropriate for the topic to be covered. There will also be support provided on a continuing basis from the members of staff responsible and a tutor.
The data required for you to carry out your own analysis for project one is available on MyPlace for download. However, it is expected that some of you will wish to collect other data independently through other sources where required.
The third project is less easy to define and the topic can be chosen from any area of finance. This will give you the opportunity of studying in depth any issue that you find particularly interesting. The project is not structured like the first two and requires you to take the initiative in the choice of topic and the methodology to be employed. You will have to identify the relevant readings, though the member of staff designated as the project supervisor will be available to offer advice and guidance.
If a project fails to meet the required standard for the M.Sc. the candidate will be provided with a written explanation of why the project has failed to meet the required standard, and advice will be provided on the improvements necessary to bring the project up to the M.Sc. standard. Candidates are allowed to resubmit a project once. Project re-submission must normally be completed by the end of October.
The University has very strict rules on plagiarism which all students need to comply with. You will find details of the University’s regulations on plagiarism at the following webpage, please ensure that you revise these regulations which are available from the following webpage -http://www.strath.ac.uk/plagiarism/
Along with nearly all other Universities in the UK the University of Strathclyde employs an external agency (Turnitin) to determine whether any work submitted by students has been plagiarised. This agency provides a comprehensive report on the extent to which any project, report or essay has employed the work of others without appropriate recognition. Turnitin employs very sophisticated software to evaluate each submission in relation to an enormous body of previously published work in the form of books, journal articles, and reports – and this includes any papers that are currently available on the internet.
To comply with University regulations Turnitin Reports will be generated as part of the submission process.
The originality report should not have a score of above 20% with no individual match greater than 2%. The criteria for this is as follows
1. The originality report should not have a score that exceeds 20%
2. The first individual match can be no more than 5% (but only with a match to the University of Strathclyde)
3. All other individual matches cannot be greater than 2%. Small individual matches of 1% or less are common and acceptable, even if they cumulatively sum to a higher Turnitin score.
4. The submission link is where the Turnitin report will be generated when you make your submission. This can then be viewed and edited before you make your final submission.
5. The settings automatically exclude the Bibliography from the final score so if you have called this references in your project then change it to bibliography this then excludes the bibliography from the final score.
6. Commonalities included in tables can be put into inverted comma’s in the version uploaded to MyPlace and this will exclude them from the final score.
7. Please note no pages can be excluded from the upload, all other pages need to be included to generate an accurate report.
Any project submitted that has an originality report of above 20% will be deemed to be plagiarised for non reference materials. A higher proportion of quoted material be permitted may – but as it is your work there should be no overdue reliance of quotations. You should always avoid the inappropriate use of the work of others, but this may sometimes occur inadvertently. To determine whether or not this has occurred you will be allowed to use Turnitin to obtain a report on your work. If the report indicates that your work is plagiarisedit will need to be revised prior to submission to the University of Strathclyde for assessment. You can submit more than once to Turnitin. Reports are set to be generated immediately (usually within an hour), however, after 3 resubmissions reports generate after 24 hours, so please take this into account when getting closer to the submission deadline. It should be noted that Turnitin should not be used to reduce the amount of plagiarised work - you should only use your own original work in submissions.
UNDER NO CIRCUMSTANCES SHOULD YOU USE ANY OTHER ACCOUNT/LOGIN THAN YOUR OWN WHEN MAKING YOUR UPLOAD. THIS WILL AUTOMATICALLY MATCH TO YOUR OWN WORK ON ANOTHER ACCOUNT AND MAKE YOUR SUBMISSION VOID.
When uploading to MyPlace please remove the front cover of your submission - this is not required and will increase your individual matches. The report automatically includes your name when generated.
A link for each project has been set up on the MyPlace Project Submission page (https://classes.myplace.strath.ac.uk/course/view.php?id=28687).
When submitting EACH individual project you need to meet the following criteria:
1. An online copy of your project submission via the MyPlace submission link.
2. A completed assignment submission form (this is available on the MyPlace page). The project assignment form. that you need to complete and submit will automatically provide a Turnitin score – this will not be assessed as part of your project submission. It is a requirement that you complete and sign this to ensure you confirm that the project is your own work.
3. An acceptable Turn It In Report via MyPlace.
4. When making your submission you must apply the following file naming convention:
<Module number>_<lastname>_<first name>_<registration number>_<course>.docx
For example, AG940_Smith_Steven_201912345_Acc.docx the corresponding pdf file can then also be uploaded, for example AG940_Smith_Steven_201912345.Acc.pdf
Abbreviations for each of the course for naming purposes are noted below Acc – M.Sc. International Accounting and Finance Fin – M.Sc. Finance
Inv – M.Sc. Investment and Finance Bank – M.Sc. International Banking and Finance
F&M – M.Sc. Finance and Management FT – M.Sc. Financial Technology
Econ – M.Sc. Economics and Finance
Should your submission fail to meet the passmark of 50 percent then you will be permitted one opportunity to resubmit, however, the mark on the resubmission will be capped at 50 per cent. You therefore need to ensure that your submission will meet the minimum acceptable requirements in your first submission as a resubmission would imply a delay in graduation.
Please note that the research projects do not qualify for the compensation scheme (the projects are a 40 credit class that comprises 2 individual projects).
Please note that your submissions will not be returned to you, if you want a copy you need to keep a copy of this yourself.
Project One
“An Event Study Analysis in Merger and Acquisition Deals”
Submission Date: Wednesday 26th June 2024
Introduction
Merger and acquisition (M&A) is one of the major events incorporate sector. Both domestic and cross-borders M&As are growing rapidly as a form of corporate of restructuring. In M&A the choice of method of payment to the shareholders of target firm is a major decision. An acquirer could pay the shareholders of the target in the form of cash, or shares, or a combinations of various securities such as cash, shares, debt, earning etc. However, the methods of payment used carry different signals to the market which, in turn, can affect the returns to the shareholders of merging partners (acquirers & targets). Typical empirical studies on M&A show that on the announcement of a deal target company shareholders benefit substantially but acquirers either make a small gain, break-even, or suffer a small loss. Similarly, studies show that average acquirers gain in cash deals while suffer losses in share deals. Similarly, target firm shareholders also gain more in cash deals than in share deals. More recent studies suggest that the method of payment interacts with the listing status of the target to determine the gains to acquirers. Several studies have attempted to explain these phenomenon (i.e. the dependency of merging partners’ returns on payment methods) using various theories (see key papers for alternative arguments). Yet, the rationale behind the observed variations in gains by the methods of payment remains elusive. Therefore, the main research question of the project is: Are the announcement period gains to the shareholders of merging partners dependent on the methods of payment? In actual analysis this key question should be supported by further related research questions.
The most commonly used method of assessing the effect of M&A deal announcement and the methods of payment used on shareholders’ wealth is ‘Event Study’ . This method, normally used to test the semi-strong from of EMH, is also suitable to assess the implications of an event on returns of the firms involved. Fama (1991 p 1607) argues that “The cleanest evidence on market efficiency comes from event studies, especially event studies on daily returns.” Under the frame work of EMH if the market is efficient in its semi-strong form no investor can expect to make supernormal profit by capitalising on publicly available information. However, in the case of analysing the effect of M&A deal announcement we are interested in the full implication of the event on shareholders’ even if there is a delay in market’s reaction. Hereunder, we explain the methods that are most commonly used in event studies which can be applied to address the above research question.
In your project report you are required to empirically analyse at least the following issues:
Returns to acquiring firms’ shareholders on the announcement of deals, including comparative performance of acquirers of public and private firms.
Returns to listed target firms’ shareholders on the announcement of deals,
A comparative analysis of returns to acquirers and targets (separately) by the methods of payment used.
Your empirical analysis should include both univariate and multivariate methods. In multivariate analysis you are expected to assess the effects of methods of payment after controlling for the effects of other factors that are known to affect the gains to acquirers and targets. See Draper and Paudyal (2008) for an example of analysis using both approaches.
Event Study Method
Event Study method was first introduced by Fama, Fisher, Jensen and Roll (1969, hereafter FFJR). FFJR examined the effect of stock split on share price. Broadly, method could be summarised as follows:
a) Identify the event of interest, the event date and the sample companies. You should define your sample selection criteria.
b) Determine the event window, i.e. number of days surrounding the event date. Usually multiple windows are identified and the effect tested.
c) Collect share price (or return index) of each sample firm and corresponding market return for the estimation and event period. In some cases you need data only for event period.
Windows for an event study:
Estimation Period Event Window Post event
T-N1 T1 τ0 T2 T+N2
Note: τ0 is the day of event, T1 refers to the beginning of the event window and T2 refers to the end of the window. T-N1 and T+N2 refer to the beginning and end of the analysis (sample) period.
d) Estimate the risk parameters (α and β) of the firm using the data for the estimation period of a suitable length (say about 500 daily observations) prior to the event window.
e) Estimate the expected return of each stock during the event window using an appropriate asset pricing model (methods are discussed below). Subtract expected returns from actual return to obtain abnormal returns of each sample company, for each day during the event period.
f) Estimate the cross sectional average abnormal (excess) return for each day in the event window and cumulate them. This will give you the cumulative abnormal return (CAR).
g) Plot the cumulative abnormal return (CAR) against the days within the event window period.
h) If the market is efficient you expect the CAR to jumpin response to good news (or drop if the news is bad) on the day of event only. This also tells whether event has any effect on stock return. Note: it is possible that there is a delay in market reaction and EMH may be rejected but the event may have implication on asset return. The following plot which shows that the CAR of the firms jumps on the day of announcement.
Also, there is some indication of delayed reaction too.
i) Finally, examine the statistical significance of excess return on the day of the event and during multiple days’ event window using the method discussed below.
Models of Estimating Expected Returns
Finance literature offers various methods to estimate the expected return of stocks of a firm.
a) The mean adjusted model: This model assumes that the normal return of firm i is constant overtime. Thus the expected return is the mean return i.e. E(Rit), = Ri . Under this model abnormal return (Ait) is defined as the difference between the actual return on day t and mean return (i.e. Rit - Ri ). In an event study, Ri is estimated using the observations of the estimation period.
b) The Market model: This model relates the return of a security to the return of abroad market portfolio. The ‘normal’ return of a security i defined as:
Rit = α + β Rmt + εit
Where Rit and Rmt are the company return and market return respectively, while α and β are the parameters of the market model, and εit is the zero mean error term. Under this model abnormal return is defined as:
In this approach the market model parameters, are estimated using the observations from the ‘estimation period’ .
c) Market adjusted return model: In this model the expected is equal to the observed market return and hence abnormal return is defined as the difference between the company return and the market return.
Ait = Rit -Rmt
By implication this is a special case of market model where the values of α and β are imposed to be 0 and 1 respectively. This is useful in an event study where there are no sufficient observations in the estimation period to estimate the market model parameters or the estimation period is not free from the event under scrutiny. For instance, studies on IPOs where there are no pre-event observations for estimation of risk parameters or estimation of acquirers’ excess returns that are involved in multiple bids (i.e. estimation period is not free from event itself).
d) Other models: It is possible use other types of equilibrium models e.g. CAPM, APT, Multi-Index models etc. to
Project Two
A Financial Analysis and Valuation of a Company Submission
Date: Wednesday 7th August 2024
The lecturer in charge for this project is Kyung Yoon Kwon. Her office hours during this period will be Wednesday 10.00am – 12.00pm (noon). It is not mandatory to make an appointment in advance for the office hours. Please e-mail her if you have any queries or would like to arrange a (Zoom) meeting with her.
Companies previously agreed and approved (if your company is no longer suitable or has gone into receivership please e-mail an alternative to Barbara for approval – deadline to change companies is the 22nd of May 2024).
Companies Selected
If you chose a company by the deadline in March then this has been noted below.
Introduction and Project Requirements
The second project requires that you undertake a financial analysis of a company from the standpoint of a potential investor and provide an evaluation of the investment potential of the company’sshares.
An assessment should be undertaken of the company’s financial position and performance on the basis of both its financial statements and stock market performance. The discussion should also bring out clearly the financial policies of the company and how these impact on the company’s performance. This will require an evaluation of its capital expenditure programme, the form of financing adopted by the company, including an evaluation of its capital structure and its sources of equity and debt funding. You should differentiate between the use of internal sources of funding, in the form of retentions, and the new issues of equity, and also discuss the company’s dividend policy to the extent that this is not covered by the discussion of its retention policy.
In some companies it may be difficult to identify a consistent policy perspective on some of these issues – this can be documented and its implications assessed. The project should also provide an assessment of the company’s recent stock market performance to put the current share price into context. The returns achieved on the company’s shares should be evaluated using an appropriate benchmark as well as the standard market ratios – the earnings yield, dividend yield, etc.
The final objective of the project is an assessment of the value of the company and the investment value of its shares. Even the most experienced and capable security analysts find this a very difficult task, eventhough they may be monitoring a company’s performance and prospects on a continuing basis. You are simply expected to build on the financial information and analysis you have undertaken to produce some tentative assessments of value. As the focus is on the use of financial information, you are expected, firstly, to undertake a “fundamental analysis” of the company. Secondly, you are expected to use the various valuation models to provide insight into the determination of the company’s market value and make tentatively estimates of the company’s investment value.
The authors of one of the leading textbooks on security analysis and portfolio theory, Bodie, Kane and Marcus, have defined fundamental analysis in the following way:
“Fundamental analysts usually start with a study of past earnings and an examination of company balance sheets. They supplement this analysis with further detailed economic analysis, ordinarily including an evaluation of the firm’s management, the firm’s standing within its industry, and the prospects for the industry as a whole. The hope is to attain insight into future performance of the firm that is not yet recognised by the rest of the market.”
Bodie, Kane and Marcus, “Investments”, McGraw Hill, 9th ed., p.378
This implies that fundamental analysis is trying to identify stocks or shares which are “mispriced” in relation to their “true or intrinsic value” and some financial theorists might even argue that this is an impossible task. Those who accept the reasoning of efficient market theory will contend that market prices provide the only reliable estimate of intrinsic value. This view can possibly be questioned on the basis of the significant body of anomalous evidence in relation to the efficient market hypotheses that has been accumulated over the last thirty years, though there is little evidence to suggest that the market fails to take specific items of accounting information into account in valuing shares. Another response to the efficient market position is to point to the absence of a well-developed theory to explain how costly information is gathered and analysed in the absence of incentives provided by mispriced securities. It is certainly legitimate to identify the extent to which valuations derived on the basis of fundamental analysis and other approaches considered differ from market prices. Having recognised the efficient market perspective the focus of this project is on the use of analysis and models to derive estimates of intrinsic value. The issues related to valuation will need to be discussed in depth and it is expected that when the analysis has been completed, a range of values will have been developed.
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