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Examining the Relationship Between Selected Ratios and Market Capitalization of an IPO Michael Wayne Donaldson Walden University

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Examining the Relationship Between Selected Ratios and Market Capitalization of an IPO Michael Wayne Donaldson Walden University Walden University ScholarWorks Walden Dissertations and Doctoral Studies Walden Dissertations and Doctoral Studies Collection 2015 Examining the Relationship between Selected Ratios and Market Capitalization of an IPO Michael Wayne Donaldson Walden University Follow this and additional works at: https://scholarworks.waldenu.edu/dissertations Part of the Business Administration, Management, and Operations Commons, Finance and Financial Management Commons, and the Management Sciences and Quantitative Methods Commons This Dissertation is brought to you for free and open access by the Walden Dissertations and Doctoral Studies Collection at ScholarWorks. It has been accepted for inclusion in Walden Dissertations and Doctoral Studies by an authorized administrator of ScholarWorks. For more information, please contact [email protected]. Walden University College of Management and Technology This is to certify that the doctoral study by Michael W. Donaldson has been found to be complete and satisfactory in all respects, and that any and all revisions required by the review committee have been made. Review Committee Dr. Sean Stanley, Committee Chairperson, Doctor of Business Administration Faculty Dr. Kevin Davies, Committee Member, Doctor of Business Administration Faculty Dr. Robert Hockin, University Reviewer, Doctor of Business Administration Faculty Chief Academic Officer Eric Riedel, Ph.D. Walden University 2015 Abstract Examining the Relationship between Selected Ratios and Market Capitalization of an IPO by Michael W. Donaldson MS, Northern Illinois University, 1996 BS, Northern Illinois University, 1994 Doctoral Study Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Business Administration Walden University November 2015 Abstract This study examined the relationship between return on equity (ROE) and return on assets (ROA), the business sector, and long-term performance of new firms 5 years after the initial public offer (IPO) date. IPOs have a high rate of delisting from stock exchanges, and understanding possible predictors of long-term performance will benefit business owners and investors. The purpose of this study was to determine if ROE and ROA are predictors of long-term performance of IPOs on U.S. stock exchanges. The research question examined whether there is a statically significant relationship between the ROE, ROA, business sector, and market capitalization of IPOs. This study followed a correlational design to analyze the research question and its hypotheses. Both shareholder theory and financial ratio models constituted the theoretical framework for this study; public databases provided all the historical financial data on publicly traded companies. The population for this study included all firms that pursued an IPO within the United States stock exchanges from January 2007 through December 2009. Using Spearman correlations, the results suggested no significant relationship between ROE and any business sector with market capitalization of IPOs. However, there was a significant correlation with ROA and market capitalization for these IPOs. The implications for positive social change in this study are new insights for leaders concerning the survivability and monetary gain for new firms entering the public market and the new firm’s ability as a result of this gain to provide new jobs thereby improving the economy. Examining the Relationship between Selected Ratios and Market Capitalization of an IPO by Michael W. Donaldson MS, Northern Illinois University, 1996 BS, Northern Illinois University, 1994 Doctoral Study Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Business Administration Walden University November 2015 Dedication I dedicate this study to my loved ones that put up with me throughout this process. Your support and encouragement have guided me through many challenges in my life. I am thankful to you all for helping me complete this doctoral degree. Acknowledgments To my committee chair, Dr. Sean Stanley, you have encouraged me from the start. Your guidance and support are greatly appreciated, and it is truly an honor to be your first doctoral student for whom you were the committee chair. I would also like to acknowledge my committee, Dr. Kevin Davies and Dr. Robert Hockin, for their support and efforts in helping me through this process. Thank you to my editor, Toni Williams, and to my statistician, Dr. Tom Granoff. For my cohort, continue to support each other through the doctoral process, and I thank you for the opportunity to be your peer leader. Table of Contents List of Tables ..................................................................................................................... iv Section 1: Foundation of the Study ......................................................................................1 Introduction ........................................................................................................................1 Background of the Problem ...........................................................................................2 Problem Statement .........................................................................................................3 Purpose Statement ..........................................................................................................3 Nature of the Study ........................................................................................................4 Research Question and Hypotheses ...............................................................................5 Theoretical Framework ..................................................................................................6 Definition of Terms........................................................................................................8 Assumptions, Limitations, and Delimitations ................................................................9 Assumptions ............................................................................................................ 9 Limitations .............................................................................................................. 9 Delimitations ........................................................................................................... 9 Significance of the Study .............................................................................................10 Contribution to Business Practice ......................................................................... 10 Implications for Social Change ............................................................................. 11 A Review of the Professional and Academic Literature ..............................................11 Search Strategy for the Literature Review ............................................................ 13 Shareholder Theory and IPO Performance ........................................................... 14 The IPO Strategy................................................................................................... 22 i Financial Models and Ratios ................................................................................. 41 Summary and Transition ..............................................................................................52 Section 2: The Project ........................................................................................................53 Introduction ......................................................................................................................53 Purpose Statement ........................................................................................................53 Role of the Researcher .................................................................................................54 Participants ...................................................................................................................54 Research Method and Design ......................................................................................55 Method .................................................................................................................. 55 Research Design.................................................................................................... 58 Population and Sampling .............................................................................................59 Ethical Research...........................................................................................................61 Data Collection ............................................................................................................62 Instrumentation ..................................................................................................... 62 Data Collection Technique ................................................................................... 63 Data Analysis ...............................................................................................................64 Reliability and Validity ................................................................................................66 Reliability .............................................................................................................. 66 Validity ................................................................................................................. 67 Summary and Transition ..............................................................................................68
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