Testing the existence of differences in the level of under-pricing between primary and secondary offerings at the Nairobi Stock Exchange.

Abstract

The study set out to examine difference in the pricing behaviour of primary and secondary offerings of common stock initial public issues occurring at the Nairobi Stock Exchange from the period 1980 to 1997. The study was specifically motivated to unearth whether the extent of underpricing is the same for the two types of offerings. This objective was achieved by first obtaining the extent of underpricing in the whole market and subsequently in each category, thereby confirming existence of underpricing at the Nairobi Stock Exchange. Differences in levels/extent of underpricing between the two categories of offerings were tested using the . Smith-Satterthwaite test.

Secondary data used in the analysis was obtained from the Nairobi Stock Exchange and Stock Brokers. The data analysis related to the pricing was analyzed by use of summary statistics. A statistical test was performed using the t-test to find out whether the underpricing was significant. From the data analysis and findings, the research found no conclusive evidence to support the proposition that the extent of underpricing is the same for both primary and secondary types of offerings. Secondary offerings were underpriced at a higher level of 37.79 percent while primary offerings were underpriced at a lower 34.46 percent. These were statistically significant at 1O%.The difference of 3.3 percent was also signific.ant at 10% . The findings also reveal that secondary offerings appear to go to the market at a "

higher average offer price of Ks. 19.10 compared to the average offering price of primary offerings at Ks. 14.60. The difference in price was found to be statistically significant. The major implication of the study is that it is advisable for promoters of the firms going public to separate the raising of funds for the firm (primary type) from the sale of personal holdings of shareholders (secondary type) in order to reduce the level of underpricing.