Short-run and long-run ipo financial performance for firms quoted at the nairobi stock exchange

Abstract

Anecdotal evidence from the Nairobi Stock Exchange reveals that most of the IPOs are usually underpriced more so if the share price value at the end of 1st day of trading is checked against the offer price. The present study sought to establish both short-run and long-run performance of post-IPO share prices. The objectives of this study were: assess the extent of under pricing of IPO's in the Nairobi Stock Exchange; assess the short-run performance of IPOs for firms listed at the Nairobi Stock Exchange; and establish the long-run performance of IPOs for firms listed at the Nairobi Stock Exchange. A descriptive survey research design was therefore undertaken in the study. The population of this study was firms that have gone public since 2001 in Kenya. There were eight such firms with complete data and were therefore studied. The daily share prices were collected from the NSE information desk for all the stocks. This data was organized using MS Excel Spreadsheets. The study found that IPOs in Kenya were underpriced by an average of 57%. On the short- run performance of IPOs, the 7-day and 15-day abnormal returns showed the market performed better in the short-run as the cumulative abnormal returns (CAR) were 0.16 for the 15-day period. As regards the long-run performance of IPOs, the one-year and two year abnormal returns showed that there was underperformance of stocks in both periods (CAR of -0.52 for 1 year period; CAR= -1.18403 for 2 year period). The study concluded that there is a long-run underperformance of IPOs in Kenya. The study recommends the need for investors to take note of the fact that IPOs are usually underpriced in Kenya and can IV therefore offer an avenue for short-term gains especially by disposing off the stocks on day 1 of trading or on day 15 of trading. The study suggests need for more studies to be carried out to determine the factors that influence long-run underperformance of stocks in Kenya as well as the determinants of short-run performance of stocks in Kenya.