The Relationship Between Initial Public Offer Price and the Post Listing Market Price at the Nairobi Securities Exchange for Listed State Owned Enterprises

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 under performance 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 price and post listing market price of listed State Owned Enterprises on the 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 3 were chosen for the study; that the listed State Owned Enterprises. Data analysis involves the use of descriptive statistics such as mean, variance, standard deviation, Pearson‘s correlation coefficient and regression analysis. All the firms that were chosen for the study were underpriced which constituted to 100% of the population. The results of the study found that there is a positive relationship between IPO price and the first day price with a significance level of + 0.0110 and that under pricing also has a positive relationship with IPO pricing. The conclusion is that IPO price affects post listing market price. R2 of 0.9485 showed that 94.85% is explained by the model with a lower standard error of estimate of 3.869. 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.