EFFECT OF INITIAL PUBLIC OFFERING ON THE STOCKS’ LONGRUN PERFORMANCE AT THE NAIROBI SECURITIES EXCHANGE IN KENYA

Lawrence Ngao

College of Human Resource and Development,

Jomo Kenyatta University of Agriculture and Technology

P. O. Box 62000, 00200 Nairobi, Kenya

Corresponding Author email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Dr. Allan Kihara

College of Human Resource and Development,

Jomo Kenyatta University of Agriculture and Technology

P. O. Box 62000, 00200 Nairobi, Kenya

CITATION: Ngao, L., & Kihara, A. (2017). Effect of Initial Public Offering On the Stocks’ Longrun Performance at The Nairobi Securities Exchange in Kenya. International Journal of Economics and Finance.  Vol. 6 (10) pp 1 – 20

ABSTRACT

The study examined the longrun performance of the initial public offerings held at the Nairobi Securities Exchange in Kenya. From the study results, it seems that the IPOs of companies that were issued at the Nairobi Securities Exchange over the period 2006 – 2016 and purchased at the closing price of the first day of public trading tend to underperform non-IPO firms with similar characteristics over the three years following the offering. Over shorter investment horizons (up to one year), the IPOs demonstrate superior performance. The independent variables that were considered in the study are; First day differential between the offer price and closing day one price; market price-to-book value; the leverage ratio and Percentage subscription of the IPO. Both descriptive and inferential data analysis was conducted. The study conducted regression analysis using an ordinary least square regression model. The regression model was used to establish the effect of the independent variables on the long-run performance of stocks, measured by market adjusted buy – and hold abnormal returns (BHAR). The study findings revealed that price to book value as well as the percentage subscription significantly affected the long run performance of IPOs while leverage ratio and first day pricing differential did not have a significant effect on the long run performance of IPOs. The effect of price to book value is however negative while that of percentage subscription is positive. The study recommends that holding IPOs over shorter horizons might result in a profitable strategy hence investors can consider investing in IPOs in the short run and not in the long run.

Key Words: Pricing differential, Price to book Value, Leverage ratio, Percentage Subscription, Long run Performance

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