Initial public offer performance in Kenya

Abstract

The objective of this study was to investigate the long run performance ofIPOs in Kenya for the period 1992 to 2000 and establish whether there is existence of patterns on the. market. Having assessed the performance, the second objective was to examine whether the market was characterized by the "hot issues market" phenomenon. The long run performance was determined using daily adjusted returns and cumulative daily average returns of the IPO and the market average in examining the returns. Linear regression analysis and descriptive statistics were used to analyse the performance using a computation software, spss. The significance of long run performance is; First, to an investor, the existence of price patterns may present opportunities for strategic trading to maximize on returns, it is expected that the volume of IPOs displays large variations over time. Second, If high volumes are associated with poor long run performance, this would indicate that issuers are successfully timing offers t? take advantage of periods when the equity market is overvalued known as "windows of opportunity", third, The cost of external equity for companies going public depends not only on the transaction costs of going public but also upon the returns that that investors receive in the after market. To the degree that low returns are earned in the after market, the cost of external equity is also lowered for these firms. The implication of this is that the affected firm will not be able to attract a relatively high return in the secondary market should they wish to float shares. To summarize the empirical findings of this paper, the average holding period return for a sample of 9 Initial Public Offerings of common stock issued in 1992 to 2000 in the three years after going public, The findings were analysed in two stages; the initial period (day zero) described as the offer date and the close of the first trading day; and the long run period measured from the closing market price on the first day of public trading to the market price on the third year anniversary. The findings of the study showed that in the short run, IPOs earned high initial returns to the market return. The period of issue was also found to be important. Stocks which were issued when the market index was high registered higher initial returns on the closing day of the first day of trading. In the long run, IPOs under performed the market. They however registered positive returns in the after market save for two stocks within the sample viz National Bank of Kenya Ltd and Rea Vipingo. The findings also found the existence of "hot periods" within the market. The implications of findings are that issuers are able to take advantage of "windows of opportunity" and time the market when the market is buoyant and raise high capital from the market whereas investors are equally able to develop superior strategies to earn superior returns from IPas. The study shows that investors are better off buying in the pre market and disposing off the stock in the secondary market in the initial days of trading rather than buying in the after market and holding the stock for a three year hold and buy period.