Effect of Subscription Rate on Initial Public Offerings Performance at the Nairobi Securities Exchange

Abstract

Factors that affect IPO performance both in the long run and in the short run have been researched on extensively. Underpricing is the term that is commonly used to describe first day gains or returns of an IPO. Under pricing is the difference between first trading price and the IPO offer price. The focus of the study was to determine the effect of IPO subscription rate on IPO performance in terms of first day trading gains at the NSE .This study analyzed nine IPO’s that took place from 2006 to September 2014 which was considered as the most active years in the NSE reflecting both bearish and bullish markets. Data was collected and regression analysis was used. The general results of the study were consistent with the findings in the literature review that there is a positive relationship between IPO subscription rate and IPO performance. The study found that the average subscription rate of IPO’s was 375.4% which was an increase from 272.49 % as found by a study conducted by Mwathi(2013).An earlier study that had been carried out by Cheluget( 2008) had found the average subscription rate to be 291.08%.Average first day gains for the IPO’s in the study was found to be 67.67% .This was an increase compared to a similar study carried out by Cheluget (2008) who had found average first gains to be 40.28%.The average rate of 67.67%o is high compared to more developed exchange markets. This is consistent with findings by (Loughran, Ritter, and Rydqvist, 1994) who established that level of underpricing is particularly high in emerging markets.Ibbotson( 1975) found that the short-run performance of IPO’s in the US showed an average first day return of 11.4% .Paudyal (1996) found that IPO,s in the UK IPOs recorded an initial return of 38.7%.Studies have shown that initial returns for IPO in emerging markets for Malaysia, Korea, and Brazil are on average 80%.Empirical evidence shows that China before 2005 had the highest initial return in the world markets with returns that range from 200% to 900% . The study established and confirmed that the IPO subscription rate has a positive relationship with IPO performance in terms of first day gains. Pre IPO demand has an effect on the IPO first day performance which was in line with findings by Yong (2007) and Cheluget( 2008).