One of the theories regarding initial public offering (IPO) pricing is that the initial return (change from offer to open price) on an IPO depends on the price revision (change from pre-offer to offer price). Another factor that may influence the initial return is a high-tech dummy that equals 1 for high-tech firms and 0 otherwise. The following table shows a portion of data on 264 IPO firms from January 2001 through September 2004.

Initial Return (%)......... Price Revision (%).......... High-Tech Dummy

33.93........................................ 7.1 4................................. 0

18.68...................................... −26.39.................................0

⋮...................................................................⋮.............................................. ⋮

0.08....................................... −29.41................................. 1

a. Estimate a model with the initial return as the response variable and the price revision and the high-tech dummy variable as the explanatory variables.

b. Reestimate the model with price revision along with the dummy variable and the product of the dummy variable and the price revision.

c. Which of these models is the preferred model? Explain. Use this model to estimate the initial return for a high-tech firm with a 15% price revision. Compute the corresponding initial return for a firm that is not high-tech.