Financial statements and success of rights issues at the Nairobi stock exchange:1998 - 2002

Abstract

The study set out to determine the role financial ratios help in forecasting the success or failure of a rights issue. This is a number of companies at the Nairobi Stock Exchange have failed in their attempt to raise capital through a right issue. There is no evidence to be relied on in explaining failure of these companies to raise the required capital through a rights issue. The approach in this study is to compare ratios that capture performance and financial position of the firms that offered a right issue before and after the right issue. The three year (at times five years) average before and after the issues are compared to decipher information useful in explaining the success or otherwise right issue. The findings show that the successful firms performance and financial ratios outperformed the less successful ones. The ratios that have higher discriminating power were return on equity, debt equity ratio, dividend payout ratio, growth in dividends and earnings net worth to total assets. The one that had poor explanatory powers are growth in total assets, profit margin, cash flow to debt. The tentative conclusion of the finding is that investors may rely on ratios extracted from financial statements in making the decision to exercise their right or not.