Analytics of Firm Pairs

Advanced Business Finance FI414
Project 2
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. The deadline for the empirical project
is Saturday, Mar 21, 2020 23:59 hours. You should submit a digital copy to me
through D2L before the deadline. Late submission will receive a 0.5 point deduction
in grades out of a total of 10 points. From the menu of “Dropbox Folders” at D2L,
you will find the link of submission to Project 2.