Long run performance of initial public offerings:Evidence from the Nairobi stock exchange

Abstract

Long run performance of IPOs has elicited much research the world over. Much interest by scholars has been on the anomalies on initial over performance and long run underperformance. It is amazing to note that majority of recent IPOs in Nairobi Stock Exchange have been highly oversubscribed with Eveready recording over 800%, yet research on IPOs point that IPOs underperform the market in the long run. The overwhelming success of the KenGen IPO at the NSE generated a lot of awareness in investment in shares among ordinary Kenyans of all ages, professions and income levels. The landmark IPO led to a massive interest in opening stock brokerage accounts and investing in Kenya. According to the Central Depository and Settlement Corporation (CDSC), the number of people with CDS accounts increased significantly and as at the end of June 2007 stood at over 750,000 accounts up from 78,300 in December 2005; a noteworthy tenfold increase in only one-and-a-half years. The IPO was oversubscribed by 330%. The IPOs following KenGen had higher oversubscriptions, with Eveready recording over 800%. The begging issue is the long run performance of these IPOs. In conformity to previous studies on the long run performance, the study confirmed that IPOs underperformed the market by -0.62% using MABHR methodology. However interestingly, using CAR, IPOs underperformed the market by -0.01% presenting a difference of 0.61% from results of MABHR methodology. The study confirmed that different results are obtained if different methodologies are used.