The short-run performance of initial public offerings in the Nairobi stock exchange.

Abstract

This study was aimed at contributing to the growing question surrounding the performance of IPOs on the Nairobi stock exchange. It aimed at testing whether investors can make abnormal returns by buying IPOs at their issue price and consequently selling them on the first day of trading. It also aimed at evaluating if the IPOs are able to sustain their initial abnormal returns over a longer time horizon. The study examines 5 Kenyan IPOs issued between 1998 and 2008. It uses both descriptive statistics and regression analysis to measure the performance of these IPOs. The Market Adjudted Initial Return (MAIR) is used to calculate the excess return on the first day of trading whereas the Cummulative Average return is used to measure the IPOs performance over the 15 month period. An average market adjusted initial return (MAIR) of 70.06% was reported on the first day of trading and a Cumulative Average Return (CAR) of 0.98% was reported at the end of the 15 months. Therefore, it reports a significant drop in returns, a phenomena commonly referred to as longrun under-performance. The regression results of the data analysis support the ex ante uncertainty hypothesis, the signaling hypothesis and, to some extent, the market cyclicality hypothesis as possible!e explanations for the underpricing phenomenon on the Kenyan IPO market.