Empirical Project - Analytics of Firm Pairs

Analytics of Firm Pairs

In many industries, major participants compete for market share and growth for a long time. Notable examples include, e.g., Pepsi vs Coke, GM vs Ford, Mastercard vs Visa, Nike vs Adidas, Microsoft vs Apple.

In this project, your team selects a major pair of firms in an industry and provides the following analyses:

1.   Compute rolling-window stock return correlations between the two firms from the beginning of 2015 to end of 2019 (based on a 12-month window). What is the average correlation? Why does the correlation fluctuate over time?

Download the 10-K filings (annual reports) for the two firms in these years. Read “Item 1A Risk Factors.” What are the common risk factors of the two firms and what are their idiosyncratic risks? Do you think they help explain the correlation?

2.   Compare the leverage ratios (book value of debt to the market value of equity) of the two firms over time. Which firm is more aggressive in using debt to grow the business? How would you explain the differences in their leverage ratio?

3.   Compare the valuation ratios of the two firms (Price/Earnings Ratio or the ratio of Market Value of Equity to Book Value of Equity). How do you explain the difference in the valuation ratios?

4.   Based on your analyses, which firm would you recommend as a more superior investment?

This empirical project requires a lot of work. I encourage you to work on the project immediately after you think through the process. The report should contain approximately 5 pages including tables and figures (double-spaced, singled-sided, minimum  12-point font Times New  Roman,  2.5cm  margin). I will evaluate your report based mainly on the rigor of the analysis.

Empirical Project - Analytics of Firm Pairs

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