IR Explained: Q7-9: Kenyan IPOs

May 21, 2012

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This post is part of a series--IR Explained--that walks through the sample Integrated Reasoning questions provided in the latest edition of the GMAT Official Guide.

The passage, "Kenyan IPO pricing," looks like a Reading Comprehension passage, but be careful not to approach with the same expectations. Multi-Source Reasoning passages contain many facts, but usually in more of an overview format than Reading Comprehension passages, which are usually self-contained essays.

The passage informs us of the researchers' intent: measuring the correlation between IPO stock share price and four elements that they expected would correlate with it. They discovered than none of the factors correlated strongly with IPO stock share price, and two--investor sentiment and board prestige--"showed a strong negative correlation."

On a different subject, the rest of the passage tells us that, on average, the IPOs were underpriced, and explains the implications of IPO underpricing.

The table in the second tab, "Kenyan IPOs, 1994-2008," contains several rows, but it is not as complicated as you might expect. There are no measurements for the four variables the researchers tested against IPO stock share price. Instead, we only have IPO year, share price, first day closing price, and the percent change of the stock price on the first day.

In all Multi-Source Reasoning questions, take your time understanding the content of all the tabs. You have at least a minute or two to review this content before starting in on the questions.

Question 7 could come straight from the Verbal section: it is an inference question. Consider 7A. The passage makes no connection between the (negative) correlation of stock share price and board prestige and underpricing, so nothing in that vein can be inferred. 7A is Not inferable.

For 7B, check the table. Firestone East Africa's stock price slightly decreased on the first day, so in fact, it set its IPO price higher than it should have. 7B is Not inferable.

7C is answerable from the conclusion we drew in 7B. Firestone East Africa's IPO was not underpriced, so at least one firm did not have an underpriced IPO. 7C is Inferable.

The structure of Question 8 is simply a continuation of Question 7; it has swapped "inferable" with "supported." 8A requires that you piece together some information from the passage and the table. Since board prestige was strongly negatively correlated with IPO stock share price, a company with a low IPO stock share price would likely have a board considered more prestigious than one with a higher IPO stock share price. Co-Operative Bank's IPO stock share price was nearly double that of Safaricom, so it is inferable that Safaricom's board was considered more prestigious. 8A is Supported.

8B is a different story. While firm size was one of the variables the researchers considered, it was not one of the two that was discovered to have a strong negative correlation with IPO stock share price. Thus, given the limited information we have about the researchers' findings, nothing about firm size is inferable from IPO stock share price. 8B is Not supported.

Investor sentiment is one of the two variables that was discovered to have a strong negative correlation with IPO stock share price, so 8C is more complicated. If 8C is supported, we would expect that Kengen, with its better investor sentiment, would have a lower IPO stock share price than Scangroup or Eveready. But according to the table, Kengen had the higher IPO stock share price of the three. 8C is Not supported.

Thankfully, Question 9 has only one part. "Function" questions like this one (which also appear occasionally in Reading Comprehension) can require precision. In this case, almost all of the choices have something to do with the passage's introduction of "board prestige."

We can eliminate choice (A), which has nothing to do with board prestige. (B) is too broad for this question; while the researchers discover that some variables are not accurate predictors of IPO pricing, the reference to board prestige serves a narrower purpose. (C) is better: it acknowledges that board prestige is one of many variables, and specifies that it is one of the variables whose results were surprising. (D) is too narrow: the passage does more than simply mention board prestige. And (E) is too broad; while the passage cites correlations, it doesn't go into enough detail to "demonstrate" anything. (C) is correct.

Stay tuned (or subscribe) for more Integrated Reasoning explanations



About the author: Jeff Sackmann has written many GMAT preparation books, including the popular Total GMAT Math, Total GMAT Verbal, and GMAT 111. He has also created explanations for problems in The Official Guide, as well as 1,800 practice GMAT math questions.

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