The Relationship Between Direct Cost of Raising Equity Capital and Gross Proceeds of Companies Listed on the Nairobi Stock Exchange (Nse)

Abstract

There have been questions as to why most companies do not raise equity capital from the public in Kenya by issuing shares even with the increased tax incentives for such issuers. It has not been clear as to whether the costs of such funds are prohibitive compared to those of alternatives sources. No study has been undertaken in Kenya to establish the cost of raising equity capital from the public. This paper is focused on the cost of raising equity capital in Kenya. It utilized secondary data on costs and expenses for a sample of 37 issues being both IPOs and SEOs between 1990 and 2005 as published in the prospectuses, audited financial statements and other source documents obtained from both the Capital Markets Authority (CMA) and Nairobi Stock Exchange (NSE),to test the following hypotheses: 1. Average cost of an issue decreases with increase in gross proceeds 2. Average cost of an issue increases with increase in gross proceeds Analysis results indicate that the average cost of raising equity capital in Kenya is 10.24% of the gross proceeds. It has also been revealed from the findings that IPOs are more costly than SEOs and that rights issue-s are cheaper with only 4.5% of the gross proceeds being consumed by direct floatation costs. On the basis of this analysis it turns out that flotation costs are lower if the issuer opts to raise high proceeds from the issue thus as far as the economies of scale view is concerned, there is clear evidence in favor of this view. On the relationship between direct cost of capital and gross proceeds, regression analysis was significant that gross proceeds explain changes in direct floatation costs although other factors exist that may contribute to the change but not on the same extent as gross proceeds