The effect of initial public offering on long run stock price performance of companies listed at the Nairobi securities exchange

Abstract

Long run performance of IPOs has elicited much research the world over. Much interest by scholars has been on the anomalies on initial over performance and long run under performance. It is amazing to note that majority of recent IPOs in Nairobi Stock Exchange have been highly oversubscribed with Eveready recording over 800%, yet research on IPOs point that IPOs under perform the market in the long run. The objective f the study was to dete rmine the effect of IPOs on long - run stock price performance of companies listed at NSE. A t otal of eight companies which made IPOs between 2006 - 2011 where considered represe nting 13.11% of the population. Data used was purely secondary data from the NSE website and Central Bank. Collected data was analyzed using M ean A djustment B uy H old R eturns and C ummulative A bnomal R eturns and test of significance at 95% confidence level. The re search established t hat IPO s of Eveready East Africa had highest subscription of 830%, Scan Group with 620%, Safaricom with 532%, Kenya RE with 405%, Access Kenya with 363%, KENGEN with 333%, Co - Operative Bank Ltd with 80% and BRITAM with 60% hence researc h established that IPOs where averaged oversubscribed by 402.8% . T he study confirmed that IPOs Over performed the market by 0.537 % using MABHR methodology. However i nterestingly, using CAR, IPOs over performed the market by 1.186 % presenting a difference of 0.649 % from results of MABHR methodology. Testing at 95% confidence level t here was significance difference between MABHR and CAR in long run IPOs performance hence the study confirmed that different results are obtained if different methodologies are u sed. T o improve on IPOs performance t he CMA and NSE should encourage and provide favorable environment for more private companies to list in the NSE by relax ing the regulations in trading . To promote true and correct pricing of shares, the minimum shares t raded should be raised so as to encourage individual and small & medium enterprises investors to use institutional investors to trade at the stock market. Since institutional investors are more enlightened on the correct valuation of shares, individual and SME investors will gain from the expertise of the institutional investors. The CMA should have strict mechanism to ensure that poor IPOs are not offered in the market especially during hot IPO periods. Oversubscription by the companies will be eliminated since the companies with highest subscriptions performed poorely compared to less subscriped IPOs. This will promise and ensure that investors are protected from companies that want to take advantage of over valuations in the market arising from the IPOs.