DOCSLIB.ORG

Back-Testing Magic an Analysis of the Magic Formula Strategy

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Back-Testing Magic an Analysis of the Magic Formula Strategy Back-testing Magic An analysis of the Magic Formula strategy Master Thesis Investment Analysis Author: R.H. Blij Student number: 323008 Supervisor: Dr. R.G.P. Frehen Chairman: Dr. F. Feriozzi Department: Department of Finance Faculty: Economics and Business Administration Date: October 18, 2011 Abstract This paper performs a back-test of the magic formula strategy first introduced by Joel Greenblatt in 2006 in his book “The little book that beats the market”. The magic formula is a method of stock selection where the highest combined scores for Return on Capital and Earnings Yield qualify as the best investment. Greenblatt (2010) provides results from the magic formula strategy that are able to persistently outperform the market from 1988 to 2009. I try and mimic these returns to either validate or reject the claims as made by Greenblatt. To do so a dataset is composed of the NYSE, AMEX and NASDAQ where all stocks are ranked using Earnings Yield and Return on Capital. The results confirm the findings as stated by Greenblatt where both the value-weighted and equally-weighted abnormal returns exhibit strong persistence at high significance. The results remain persistent under alternating investing conditions, like a longer holding period and higher required market capitalization for each stock. Furthermore, a sub sample is tested from the publication of the book in 2006 to 2010. Results during this period are statistically insignificant. Either the publication of the Magic formula has led to its own demise, or the overall downturn in the market temporarily invalidated its use. No decisive conclusion can be made in this respect. Acknowledgements: I would like to thank my supervisor Dr. R.G.P. Frehen for his invaluable help and patience when writing this paper. The Chairman, Dr. F. Feriozzi, for taking the time to read this paper and his position on the exam committee. Furthermore, I would like to thank my family, friends and especially my girlfriend for sticking by me even during stressful times. 1 Table of Contents 1. Introduction ........................................................................................................................... 3 2. Literature ............................................................................................................................... 6 2.1 The Magic Formula ............................................................................................................................................. 6 2.2 Market anomaly................................................................................................................................................... 8 2.3 Performance ...................................................................................................................................................... 12 2.4 Explaining value strategy persistence ............................................................................................................... 13 3. Hypothesis ............................................................................................................................ 17 3.1 Additional hypotheses: ...................................................................................................................................... 18 4. Data & Methodology ........................................................................................................... 20 4.1 Data ................................................................................................................................................................... 20 4.2 Portfolio formation: ........................................................................................................................................... 21 4.3 Methodology ..................................................................................................................................................... 23 5. Empirical Results ................................................................................................................. 26 5.1 Magic formula portfolio .................................................................................................................................... 26 5.2 Alterations: ........................................................................................................................................................ 35 5.3 Sub-sample ........................................................................................................................................................ 39 6. Conclusion ............................................................................................................................ 40 6.1 Hypotheses ........................................................................................................................................................ 40 6.2 Conclusion......................................................................................................................................................... 43 7. Recommendations ................................................................................................................ 46 References .................................................................................................................................... 47 APPENDIX A: Inversed Magic ................................................................................................. 51 APPENDIX B: Group portfolios ............................................................................................... 57 APPENDIX C: MF complete regression statistics ................................................................... 59 APPENDIX D: Subsample Statistics ......................................................................................... 61 2 1. Introduction very investor seeks a way to outsmart Mr. Market, the next best investment strategy that E earns high abnormal returns. Achieving abnormal return is often dubbed as impossible when we believe the Efficient Market Hypothesis (EMH) to hold true. It is generally believed that security markets are extremely efficient and reflect all available information. As soon as new information arises all market participants quickly incorporate the news into their price, without delay. Thus, predicting future stock prices using past information is a futile endeavor. If all market participants have the same information, all parties would trade on this information making the best obtainable return the same as the market return. In result, the optimal portfolio is one that is completely invested in the Market. The investor is unable to earn above-average returns without accepting above-average risks1. This paper discusses the question whether or not it is possible to obtain an abnormal return by looking at publically traded information used in The Magic Formula strategy. Clearly this would violate the EMH and would thus be a market anomaly. Forgoing literature has identified several anomalies, for example persistent higher returns in January and seasonal effects in stock prices. Keim (1998) provides an extensive overview of these different anomalies. One anomaly that has increased its presence in current literature is the persistent outperformance of value investing strategies. Value investing is school of thought on investing were the company‟s fundamental values are pertinent in the decision process to either buy or sell the share. This approach was first advocated by Benjamin Graham and David Dodd in 1928 at the Columbia Business School. The idea behind the approach is simple: “invest in stocks that have low price relative to some measure of their fundamental value”. In this context the fundamental value can be book value, market value, intrinsic value etcetera. Even though the idea is simple, there has been a lot of criticism that if the price is low, the possibility that it will drop further is still very likely. Graham himself has several value measures he considers to make sure that besides being cheap the company is still healthy and thus has potential. Graham looks for stocks trading at a discount to their Net Current Asset Value (NCAV). In essence stocks which have a market value lower than their current asset value. In the event of a bankruptcy the investor can still recover his initial investment as the stock is trading 1 For more information see; Malkiel (2003) 3 below its‟ liquidation value. This strategy utilizes the book-to-market anomaly, which is well reported by Fama and French (1992) as a key variable in explaining stock market variance. Value investing differs from regular investment theory in that it does not believe that the CAPM and beta are good determinants for a share‟s market price. Modern Portfolio Theory in their eyes is inadequate and should not be used to determine a reliable price or construct a profitable portfolio. Montier (2009) explains that in order for the CAPM to work, it must abide to a set of underlying assumptions which are at odds with reality. Fama and French (2004) show that returns predicted by the CAPM are not in line with the true returns during the period of 1928- 2003 They go as far as saying “we also warn students that despite its seductive simplicity, the CAPM’s empirical problems probably invalidate its use”. Malkiel (2003), a strong proponent of the EMF, admits that some market participants demonstrate less than rational behavior resulting in pricing irregularities and even predictable patterns in stock returns for short
Load more

Recommended publications
  • Graham & Doddsville
    Graham & Doddsville An investment newsletter from the students of Columbia Business School Issue XXVI Winter 2016 Inside this issue: 25th Annual Craig Effron of Scoggin Capital Graham & Dodd Management Breakfast P. 3 Craig Effron P. 5 Craig Effron is the co-portfolio manager of Scoggin Capital Management, which he founded with partner Curtis Schenker in Jeff Gramm P. 19 1988. With approximately $1.75 billion in assets under management, Scoggin is a global, opportunistic, multi-strategy Shane Parrish P. 30 Craig Effron event-driven fund. Scoggin focuses on identifying fundamental Jon Salinas P. 39 long/short investments through three primary strategies including event driven equities with a catalyst, special situations, and distressed credit. Mr. Student Ideas P. 47 Effron began his career as a floor trader on the New York Mercantile Exchange and New York Commodity Exchange. Mr. Effron received a BS in Economics from the (Continued on page 5) Editors: Brendan Dawson Jeff Gramm ’03 Shane Parrish MBA 2016 of Bandera of Farnam Scott DeBenedett Partners MBA 2016 Street Anthony Philipp Jeff Gramm manages Shane Parrish is MBA 2016 Bandera Partners, a the curator behind Brandon Cheong value hedge fund based Shane Parrish the popular Jeff Gramm in New York City. He Farnam Street MBA 2017 teaches Applied Value Blog and founder Eric Laidlow, CFA Investing at Columbia Business School of the Re:Think Workshops on MBA 2017 and wrote the upcoming book “Dear Innovation and Decision Making. (Continued on page 19) (Continued on page 30) Benjamin Ostrow MBA 2017 Jon Salinas ’08 of Plymouth Lane Capital Management Visit us at: www.grahamanddodd.com Jonathan Salinas founded RolfPlymouth Heitmeyer Lane in April 2013 and acts www.csima.info as sole portfolio manager to the Fund.
    [Show full text]
  • Greenblatt Briefing Book
    BRIEFING BOOK Data Information Knowledge WISDOM JOEL GREENBLATT Location: Forbes, New York, New York About Joel Greenblatt ......................................................................... 2 Debriefing Greenblatt ......................................................................... 3 Greenblatt in Forbes "Books Can Make You Rich,” 12/21/09………………………… 7 "Value In Construction, Not Housing," 09/30/09………………. 9 “Five Little Book Stocks That Beat The Market," 03/31/09…… 12 "Beat The Market With Magic Stocks,” 01/30/07……………… 19 The Greenblatt Interview ………………………………………………… 19 ABOUT JOEL GREENBLATT Intelligent Investing with Steve Forbes Joel Greenblatt is the founder and managing partner of the hedge fund Gotham Capital. He is also the co- founder of Formula Investing, an investment system that offers a value-based investment strategy chronicled in one of Greenblatt’s books called The Little Book That Beats The Market . Greenblatt is chairman of Harlem Success Academy I and III and the Success Charter Network, which is a chain of charter schools in New York City. He is also the former chairman of the board of Alliant Techsystems, an aerospace and defense company. Greenblatt has been an adjunct professor at the Columbia Business School since 1996 where he teaches value and special situation investing. Greenblatt also wrote You Can Be A Stock Market Genius . Greenblatt received his bachelors degree and MBA from the Wharton School at the University of Pennsylvania. - 2 - DEBRIEFING GREENBLATT Intelligent Investing with Steve Forbes Interview conducted by Alexandra Zendrian January 22, 2010 Forbes : Can you describe the magic formula for investing and how you came up with it? Joel Greenblatt: This is what I wrote the book about five years ago. It follows the principles I’ve used in investing since I started my firm in 1985 and I’ve been teaching at Columbia for the past 14 years and these are the principles I’ve used to teach.
    [Show full text]
  • Application of Synthesis of Several Methods in Stock Valuation
    ISSN: 0798-1015 Vol. 41 (34) 2020 • Art. 19 Recibido/Received: 22/06/2020 • Aprobado/Approved: 19/08/2020 • Publicado/Published: 10/09/2020 Application of synthesis of several methods in stock valuation Aplicación de síntesis de varios métodos en valuación de existencias SEDOVA, Nadezhda V.1 BUZULUTSKIY, Mikhail I.2 MISHAGINA, Marina V.3 ROMANOV, Ilia P.4 Abstract: Stock analysis is a complex and relevant topic in modern theory of financial management. In our time, many different stock analysis methods have been developed based on various theories. The article proposes the use of best practices of stock analysis using a method that combines principles developed by American investors Benjamin Graham and Joel Greenblatt. The proposed method is based on the theory of value investing, which remains stable and efficient investment strategy in our days. The main purpose of this article is to provide essential points of assessing the quality of companies and explain the decision making process behind the stock investments. The article presents data and excerpts from researches confirming the effectiveness of the principles taken as a basis. A description of the proposed method is presented, as well as the rationale of the used ratios. After familiarization with the proposed method, an analysis of several companies of various sectors was done in order to implement the theory in practice and determine the best company for the possible purchase of its stocks. Keywords: Investment strategy, Stock analysis, Value investing, Margin of safety Extracto: El análisis de la reserva es un tema complejo y relevante en la teoría moderna de la gestión financiera.
    [Show full text]
  • Opportunities for Patient Investors Door Seth Klarman
    AHEAD OF PRINT Financial Analysts Journal Volume 66 ! Number 5 ©2010 CFA Institute PERSPECTIVES Opportunities for Patient Investors Seth A. Klarman and Jason Zweig t the CFA Institute 2010 Annual Confer- revert to the mean, as Graham and Dodd might have ence in Boston (held 16–19 May), Jason expected, is probably lower today than in the past. Zweig sat down with legendary investor Also, the financial books of a company may not A Seth Klarman to gain insights into Mr. be as reliable as they once were. Don’t trust the Klarman’s successful approach to investing. numbers. Always look behind them. Graham and Zweig: The first question I would like to ask Dodd provide a template for investing, but not you, Seth, concerns your work at Baupost. How exactly a detailed road map. have you followed Graham and Dodd, and how Zweig: Seth, you started your career at have you deviated from Graham and Dodd? Mutual Shares, working for Max Heine and along- Klarman: In the spirit of Graham and Dodd, side Mike Price. Can you give us a couple of lessons our firm began with an orientation toward value you learned from those gentlemen? investing. When I think of Graham and Dodd, how- Klarman: What I learned from Mike—and I ever, it’s not just in terms of investing but also in worked most closely with him—was the impor- terms of thinking about investing. In my mind, tance of an endless drive to get information and their work helps create a template for how to seek value.
    [Show full text]
  • Li Lu's Recommended Book List
    Li Lu’s Recommended Book List I. Science, Philosophy, Evolution, History of Human Civilization, Human History 1. Jared M. Diamond. 1999. Guns, Germs, and Steel: The Fates of Human Societies. New York, NY, US: W.W. Norton & Co. 2. Ian Morris. 2011. Why the West Rulesfor Now: The Patterns of History, and What They Reveal About the Future. London, UK: Picador. 3. Ian Morris. 2013. The Measure of Civilization: How Social Development Decides the Fate of Nations. Princeton, NJ, US: Princeton University Press. 4. E. O. Wilson. 2012. The Social Conquest of Earth. New York, NY, US: W. W. Norton & Co. 5. David Deutsch. 2011. The Beginning of Infinity: Explanations that Transform the World. London, UK: Allen Lane. 6. David Deutsch. 1997. The Fabric of Reality: The Science of Parallel Universes -- And Its Implications. New York, NY, US: Allen Lane. 7. Matt Ridley. The Rational Optimist: How Prosperity Evolves. Harper. 2010. 8. Karl Popper. The Logic of Scientific Discovery. Routledge. 2002. 9. Karl Popper. The Open Society and its Enemies. Princeton University Press. 2013. 10. Richard Dawkins. The Selfish Gene. Oxford University Press. 1990. 11. Yuval N. Harari. 2015. Sapiens: A Brief History of Humankind. New York, NY, US: Harper. 12. Niall Ferguson. 2012. Civilization: The West and the Rest. Penguin Books. 13. Steven Pinker. Enlightenment Now: The Case for Reason, Science, Humanism, and Progress. Viking. 2018. 14. Steven Pinker. How the Mind Works. W. W. Norton & Co Inc. 1997. 15. Charles Van Doren. A History of Knowledge: Past, Present, and Future. Ballantine Books. 1992. 16. Karen Armstrong. A History of God: The 4000-Year Quest of Judaism, Christianity and Islam.
    [Show full text]
  • The Little Book of Behavioral Investing by James Montier
    Table of Contents Little Book Big Profits Series Title Page Copyright Page Dedication Foreword Introduction The Most Important Lesson of All The Power of Star Trek So, Are You Spock or McCoy? X Unchecked Chapter One - In the Heat of the Moment The Perils of Procrastination The Power of Pre-Commitment Chapter Two - Who’s Afraid of the Big Bad Market? Brain Drain and Performance The Cure for Temporary Paralysis Chapter Three - Always Look on the Bright Side of Life Optimism and the X-System Nature versus Nurture Beating Over-Optimism Chapter Four - Why Does Anyone Listen to These Guys? Why Does Anyone Listen to Jim Cramer? The Shocking Dangers of Doing What We Are Told Fund Managers: Weathermen or Doctors? Overconfidence May Be Hazardous to Your Wealth Chapter Five - The Folly of Forecasting So, Why Do We Keep Forecasting? Why Do We Use Forecasts? There’s Got to Be a Better Way Chapter Six - Information Overload Is More Better? When Less Is More From the Emergency Room to the Markets Chapter Seven - Turn off That Bubblevision! Meet Mr. Market Chapter Eight - See No Evil, Hear No Evil The Sorry Tale of Sir Roger Prisoners of Our Preconceptions Kill the Company Chapter Nine - In the Land of the Perma-Bear and the Perma-Bull Hanging onto Your View Sunk Costs at the Root of Conservatism Chapter Ten - The Siren Song of Stories Stock Market Stories Beware of Capitalizing Hope Focus on the Facts Chapter Eleven - This Time Is Different Why Can’t We Time Predictable Surprises? A Beginner’s Guide to Spotting Bubbles Your Edge Over the Pros! Chapter
    [Show full text]
  • The Little Book That Still Beats the Market
    12949 Greenblatt ffirs.f.qxd 10/7/05 8:50 AM Page iii The Little Book That Beats the Market Joel Greenblatt John Wiley & Sons, Inc. 12949 Greenblatt ffirs.f.qxd 10/7/05 8:50 AM Page ii 12949 Greenblatt ffirs.f.qxd 10/7/05 8:50 AM Page i The Little Book That Beats the Market 12949 Greenblatt ffirs.f.qxd 10/7/05 8:50 AM Page ii 12949 Greenblatt ffirs.f.qxd 10/7/05 8:50 AM Page iii The Little Book That Beats the Market Joel Greenblatt John Wiley & Sons, Inc. 12949 Greenblatt ffirs.f.qxd 10/7/05 8:50 AM Page iv Copyright © 2006 by Joel Greenblatt. All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or trans- mitted in any form or by any means, electronic, mechanical, photocopying, record- ing, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
    [Show full text]
  • The Little Book That Still Beats the Market
    “The best bookbook onon thethe subjectsubject in NEWin years.” years.” YORKYO — — TIMES CONTINUED FROM FRONT FLAP LE BO $19.95 USA / $23.95 CAN ITT OK BESTSEBESTSELLER L “ The Little Book [That Beats the Market ] RK The book will take readers on a step-by-step journey so $ TIMES d $ is one of the best, clearest guides to value LL that they can learn the principles of value investing in ER G In 2005, Joel Greenblatt published a book that is al- B ® investing out there.” a way that will provide them with a long-term strategy IG T S REENBLATT P F I FFinancialin Times ready considered one of the classics of fi nance litera- R O —The Wall Street Journal anc ial that they can understand and stick with through both Tim es ture. In The Little Book That Beats the Market—a New York Times good and bad periods for the stock market. Praise for bestseller with 300,000 copies in print—Greenblatt explained how investors can outperform the popular THE LITTLE BOOK THAT BEATS THE MARKET As the Wall Street Journal stated about the original edi- market averages by simply and systematically applying tion, “Mr. Greenblatt says his goal was to provide THE LITTLE BOOK THAT LITTLE BOOK THAT “Simply perfect. One of the most important investment books of the last 50 years!” $ a formula that seeks out good businesses when they are advice that, while sophisticated, could be understood —Michael Price available at bargain prices. Now, with a new Introduc- and followed by his fi ve children, ages six to fi fteen.
    [Show full text]
  • The Economics of Security Analysis
    The Economics of Security Analysis Kewei Hou∗ Haitao Mo† Chen Xue‡ Lu Zhang§ Ohio State and CAFR LSU U. of Cincinnati Ohio State and NBER July 2021¶ Abstract The investment theory, in which expected returns vary cross-sectionally with invest- ment, profitability, and expected growth, provides an economic foundation for Graham and Dodd (1934). The q5 model is a good start to explaining prominent quantitative security analysis strategies, such as Abarbanell and Bushee’s (1998) fundamental sig- nals, Frankel and Lee’s (1998) intrinsic-to-market, Greenblatt’s (2005) “magic formula,” Asness, Frazzini, and Pedersen’s (2019) quality-minus-junk, Bartram and Grinblatt’s (2018) agnostic analysis, Ball, Gerakos, Linnainmaa, and Nikolaev’s (2020) retained earnings-to-market, and Penman and Zhu’s (2014, 2020) expected-return strategy, as well as top-notch active, discretionary funds, such as Buffett’s Berkshire Hathaway. ∗Fisher College of Business, The Ohio State University, 820 Fisher Hall, 2100 Neil Avenue, Columbus OH 43210; and China Academy of Financial Research (CAFR). Tel: (614) 292-0552. E-mail: [email protected]. †E. J. Ourso College of Business, Louisiana State University, 2931 Business Education Complex, Baton Rouge, LA 70803. Tel: (225) 578-0648. E-mail: [email protected]. ‡Lindner College of Business, University of Cincinnati, 2338 Lindner Hall, 2906 Woodside Drive, Cincinnati, OH 45221. Tel: (513) 556-7078. E-mail: [email protected]. §Fisher College of Business, The Ohio State University, 760A Fisher Hall, 2100 Neil Avenue, Columbus OH
    [Show full text]
  • Tips 2020 – Keynote Speakers
    TIPS 2020 – KEYNOTE SPEAKERS Joel Greenblatt Gotham Funds – Managing Principal & Co-Chief Investment Officer Mr. Greenblatt serves as Managing Principal and Co-Chief Investment Officer of Gotham Asset Management, the successor to Gotham Capital, an investment firm he founded in 1985. Since 1996, he has been a professor on the adjunct faculty of Columbia Business School where he teaches "Value and Special Situation Investing." Mr. Greenblatt is a director of Pzena Investment Management, Inc., a global investment management firm. He formerly served on the Investment Boards of the University of Pennsylvania and the UJA Federation. Mr. Greenblatt is the author of You Can Be A Stock Market Genius (Simon & Schuster, 1997), The Little Book that Beats the Market (Wiley, 2005), The Little Book that Still Beats the Market (Wiley, 2010), and The Big Secret for the Small Investor (Random House, 2011). He is the Former Chairman of the Board (1994-1995) of Alliant Techsystems, a NYSE-listed aerospace and defense contractor. He holds a BS (1979), summa cum laude, and an MBA (1980) from the Wharton School of the University of Pennsylvania. Pearce Hammond, Jr. Simmons Energy – Managing Director, Senior Research Analyst Pearce Hammond Jr. is a managing director and senior research analyst covering Midstream/MLP and Infrastructure at Simmons Energy | A Division of Piper Jaffray℠. Hammond was with the firm from 2004-2017. After spending two years as the treasurer and head of investor relations at WildHorse Resource Development (WRD) which was acquired by Chesapeake Energy (CHK), he returned to Simmons Energy. Prior to covering the midstream and infrastructure sector, Hammond successfully led the coverage of the E&P sector as well as the launch of coverage for both the coal and the alternative energy sectors.
    [Show full text]
  • You Can Be a Stock Market Genius Even If You're Not Too Smart
    YOU CAN BE A ST ICK MARKET G E N I U S Even if you're not too smart! OF STOCK MARKET PROFITS JOEL GREENBLATT m m m You CAN BE A £ J STOCK MARKET * • GENIUS • ^ ^ (EVEN IF YOU'RE NOT W ^ TOO SMART) Jg| UNCOVER THE SECRET HIDING PLACES ^ ^• OF STOCK MARKET PROFITS •^ • m « JOEL GREENBLATT • *M m SIMON 8c SCHUSTER m m Simon & Schuster Rockefeller Center 1230 Avenue of the Americas New York, NY 10020 Copyright © 1997 by Joel Greenblatt All rights reserved, including the right of reproduction in whole or in part in any form. "Florida Gardens Restaurant Falls into Sinkhole" reprinted by permission of The Wall Street Journal, copyright © 1985 Dow, Jones & Company, Inc. All rights reserved worldwide. Simon & Schuster and colophon are registered trademarks of Simon & Schuster Inc. Designed by Jeanette Olender Manufactured in the United States of America 13579 10 8642 Library of Congress Cataloging-in-Publication Data Greenblatt, Joel. You can be a stock market genius (even if you're not too smart): uncover the secret hiding places of stock market profits / Joel Greenblatt p. cm. Includes index. 1. Stocks—United States—Handbooks, manuals, etc. 2. Investments—United States—Handbooks, manuals, etc. I. Title HG4921.G718 1997 tt2.6V22 dc-21 %-WI0 CAV ISHNOMI ACKNOWLE DG ME NTS As with any work of this kind, many people deserve the blame. Of course, the ultimate responsibility for errors, omissions, misstatements, or misguided advice rests with some guy from Cleveland who no one can seem to find. As a consequence, I have no choice but to point the finger at the following suspects: The entire cast and crew at Gotham Capital.
    [Show full text]
  • RHAPSODY ACQUISITION CORP. Earlybirdcapital, Inc
    Table of Contents Filed pursuant to Rule 424(b)(4) SEC File No.: 333-134694 PROSPECTUS $36,000,000 RHAPSODY ACQUISITION CORP. 4,500,000 units Rhapsody Acquisition Corp. is a newly formed blank check company organized for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Our efforts to identify a prospective target business will not be limited to a particular industry. We do not have any specific business combination under consideration and we have not (nor has anyone on our behalf) contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit that we are offering has a price of $8.00 and consists of one share of our common stock and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $5.00. Each warrant will become exercisable on the later of our completion of a business combination and October 3, 2007, and will expire on October 2, 2010, or earlier upon redemption. We have granted EarlyBirdCapital, Inc., the representative of the underwriters for this offering, a 45-day option to purchase up to 675,000 units (over and above the 4,500,000 units referred to above) solely to cover over-allotments, if any. The over-allotment will be used only to cover the net syndicate short position resulting from the initial distribution. We have also agreed to sell to EarlyBirdCapital, for $100, as additional compensation, an option to purchase up to a total of 450,000 units at $8.80 per unit.
    [Show full text]