The effect of initial public offerings on the stock returns of companies listed at the Nairobi securities exchange

Abstract

This study focuses on the effects of initial public offering on performance of stocks of companies listed at the Nairobi Securities Exchange. The literature reviews the effects of initial public offering on performance of stocks of companies quoted at the Nairobi Securities Exchange between 2006 and 2013. The study adopted a descriptive research design. The target population was the 62 listed companies at the NSE. Secondary data was gathered from past published scholarly articles explaining theoretical and empirical information on stock returns issues. Descriptive analysis was used including the use of weighted means. The findings indicate that initial public offerings affect stock returns of companies listed in the NSE. The study found that the median initial return and value-weighted average returns yield further insights. The median return is lower than the (equal weighted) average return suggesting that the distribution of initial returns is skewed to the right, as expected. Over the entire sample, the equal-weighted average initial return exceeds the value weighted average by a factor of 1.75, which suggests that IPO offer is an important determinant of initial return. In Kenya, several studies have been undertaken in the past on stock price response to earnings announcements, the effects of election period on stock returns at the Nairobi Securities Exchange, the information content of annual reports and accounts of companies listed at the Nairobi Securities Exchange. However, these studies focus on specific issues that may impact the stock returns. Consequently, there is lack of information on the extent to which IPOs influence stock returns at the Nairobi Securities Exchange (NSE) as well as exogenous factors that may have influenced the market return. Therefore, this study sought to evaluate the effects that IPOs had on the return of listed stocks at the NSE. In addition, the study assessed the effects of the turnover and volume traded on the stock return. Results on long-run performance are model dependent and also depend on whether equalweighted or value weighted BHARs are presented, but the benchmark calculations yield an equal weighted BHAR of almost exactly zero. Value-weighted BHARs and BHARs which control for industry sector are negative but not significantly different from zero. This will be a source of valuable information to the Capital Markets Authority, Nairobi Securities Exchange as well as investors for decision making.