Factors determining rights issue for firms listed at the Nairobi Securities Exchange

Abstract

A rights offer refers to an equity issue where all existing shareholders of the issuing company have right to sign up for new shares on a pro rata basis at a certain price and within a certain time period. Although the share rights issue is a vital process in financing of corporations, only few studies have investigated it. A company faces different alternatives when it comes to issuing equity. However, the choice between initial public offer, private placement or share rights issue remains a major problem as there is no scientific procedure that has been established through empirical research. The objective of this study was to determine the factors leading to choice of rights issue as a mode of corporate finance in Kenya. The study adopted explanatory research design with a population that consisted of the 14 firms listed in the NSE that have used rights issues between the year 2000 and 2011. This study used time series data exclusively obtained from NSE, CMA and audited financial statements of the respective firms. The data collected was analyzed using descriptive statistics, correlations, and linear regression analysis. This was achieved through the use of Statistical Package for Social Scientists (SPSS) and Microsoft Excel. Mul tivar iate regression analysis was utilised in fitting a regression model that describes the relationship subsisting between the dependent variables and independent variables From the research it was determined that the financial strength of a firm determines whether a firm has a rights issue or not. Post- rights issue ownership retention during this period impacted negatively rights issue contrary to the expectation whereas the age of the rights offer impacts positively the rights issue. It can be recommended from the study that besides this significant model explaining the variation in the rights issue, this research is informative because the findings are consistent with intriguing findings of limited prior research regarding the relevance of rights issue prospectus in guiding investors in making rational investment choice. The findings help clarify preceding empirical rights issue research regarding which factors determine rights issue pricing. Securities exchange regulatory authorities need to review the disclosure requirements for firms going public.