Mispricing and Long Run Performance of Ipos at the Nairobi Securities Exchange (Nse)

Abstract

Initial Public Offer (IPO) is the first sale of stock by a private company to the public with the objective of raising funds for expansion and growth. Studies have shown that most IPOs long run underperformance of listed companies in the developed economies is because of a time-varying phenomenon. According to Rock and Ritter (1986), under pricing is necessary to induce uninformed investors to participate in IPO offering when faced with adverse selection from informed investors. This often leads to first day price not reflecting a fair value of the IPO. Ritter (1991) and Loughran and Ritter (1995) posit that a long-term investor who buys shares of a firm right after it goes public may realize abnormal negative risk-adjusted returns and long run underperformance. This study tried to show whether these findings apply to initial public offers issued at the NSE with the overall objective of determining the relationship between IPO mispricing and long run performance of companies listed on NSE in Kenya. The study is empirical in nature and involves the use of secondary data available at the NSE and CMA data base. Out of the 58 companies registered and trading at the NSE, only 13 were chosen for the study; that is companies that got listed between 2005 and 2011. Data analysis involves the use of descriptive statistics such as mean, variance, standard deviation, Pearson‘s correlation coefficient and regression analysis. Out of the 13 firms chosen for study, only 10 of them were underpriced which constituted to 76.92% of the population. The results of the study found that there is a positive relationship between offer price in the first day price with a significance level of + 0.021 and that under pricing has a negative relationship with long run performance with a negative coefficient of -0.158. The conclusion is that offer price affects under pricing. R2 of 0.395 showed that 39.5% is explained by the model with a lower standard error of estimate of 8.46. This study would be useful to various stakeholders such as institutions intending to list, policy makers, investors and the academia .Policy Makers would also use the study to design policies that guide the operations in the market with respect to IPO pricing and information dissemination in prospectuses about the companies intending to list in future. The findings of this study would also be important to academia as would help them identify any gaps existing in the initial public offer process