The Relationship Between Offering Price and the Subscription Rate of Initial Public Offering at Nairobi Stock Exchange

Abstract

The study contained in this report investigated the price behavior of Initial Public Offering at Nairobi Stock Exchange between 1984 and 1994.The study, mainly explored the relationship between discount on these new equity issues and the rate of subscription. The rationale behind this relationship is that the issues that are underpriced more are also oversubscribed more and vice versa. The general objective was to relate/this discount on the offering price and the rate of subscription. This was to be achieved through two specific objectives:- (i) Investigate whether the initial public offering at NSE are issued at a discount or premium. That is whether the issues were underpriced or overpriced. (ii). Investigate whether this underpricing or overpricing is related to the rate of subscription. To achieve these objectives, secondary data was collected from the Nairobi Stock Exchange, Registrar of Companies and Individual Companies, for the ten years period and for all the ten companies. The data was analyzed using mainly the regression analysis and correlation analysis. The F-ratio was used to test the significant of the over all model. The data analysis related to the pricing was analyzed by use of summary statistic. A statistical test was carried out using the t-test to find out whether the underpricing was significant. The findings of this study were as follows; (i) The initial public offering at NSE during this period (1984 and 1994') were issued at a discount on average. (ii) There is a linear and positive relationship between the discount on offering price and the rate of subscription. However this relationship is not significant at 5% and 10% level of vii significance. (iii) All those companies that were over subscribed more than twice had set their offering price below the net asset value per share. The findings obtained thus led to the following conclusions: (i). The initial public offering offered at this period were issued at a discount, implying they were underpriced. (ii). There is a linear and positive relationship between the discount on offering price and the rate of subscription. However this relationship was not significant. Arising from these findings, are the implications that short-term holding were highly profitable to initial subscribers. In addition, the findings also implied that the discount on offering price has an influence on the rate of subscription of initial public offering.