Effect of share retention by pre- initial public offering shareholders on the market values of firms listed at the Nairobi securities exchange

Abstract

The objective of this study was to establish the effect of share retention on market values of firms listed at the Nairobi Securities Exchange. The study also sought to establish the effect of market capitalization to initial valuation of initial public offers on subsequent market values. The study was motivated by the notably limited studies on the effect of ownership retention by pre initial public offering shareholders at the Nairobi Securities Exchange. The study employed a descriptive research design. A census was conducted on the ten initial public offering that occurred at the Nairobi Securities Exchange between the years 2000 and 2013. The study used secondary data obtained from the Nairobi Securities Exchange handbook and the Capital Markets Authority quarterly statistical bulletin. Regression technique was used to evaluate the effect of share retention by pre initial public offer shareholders and the ratio of market capitalization to initial public offer initial valuation on market values of companies listed at the Nairobi Securities Exchange. The regression model was evaluated using the coefficient of determination R2 while the overall significance of the model was evaluated using an F-test at the 5% level of significance. The significance of independent variables was evaluated using t-test at 5% significance level. The study found that at the Nairobi Securities Exchange the pre-initial public offer shareholders on the average retained 62% of the shares in the public company. The ratio of market value of the companies relative to initial valuation of the initial public offer was found to be 1.77 times on the average. The regression analysis resulted in a coefficient of determination R2 of 33.5%. The proportion of shares retained and the ratio of market capitalization to initial valuation of public offers explained 33.5% of the variation in market values of companies conducting initial public offer at the Nairobi Securities Exchange. The proportion of shares retained by the pre-initial public offer shareholders was found to have a positive effect on the market value of listed companies. The result of t-test for the significance of the retention ratio indicated that the result was statistically significant at the 5% level. It was also found that ratio of market capitalization to initial value of initial public offer had a positive effect on market value of companies. The result of t-test for the significance of this effect indicated that the result was significant at 5% level of significance. The F-test for the significance of the overall regression indicated that the regression was significant at the 5% level. The study concluded that share retention by the pre initial public offering shareholders had a positive and statistically significant effect on the market value of the companies. It also concluded that the ratio of market capitalization to the initial valuation of public offer at the Nairobi Securities Exchange had a positive and significant effect on market values. The study recommends that since there existed a positive and statistically significant effect on market value of companies going public due to the proportion of shares retained by the pre-initial public offer shareholders, the proportion of shares retained by the initial shareholders can be relied upon as an indicator of likely future value of the firm. Also since there was a positive and statistically significant effect on market value of companies going public the study recommends that on the average firms conducting initial public offer at the Nairobi Securities Exchange experience an increase in value in the long term.