An Investigation into the Existence of Fads in the Initial Public Offering Market in Kenya

Abstract

The tested the existence of fad explanation in the IPO market in Kenya. It sought to examine the price behaviour of IPOs to test whether or not it was consistent with fad explanation. The research methodology was based on historical research design. The data used in the study were offer prices, market prices and respective 20NSE indices which were historical and so secondary in nature and available at the Nairobi Security Exchange (NSE). The population included all companies that had been listed at the NSE since its inception in 1954. Judgment sampling was used. Data was analyzed by computing Price and Index Metrics to establish price behaviour and determine market adjusted excess returns for both short and long term time. The study established that IPOs provided abnormal returns in the immediate aftermarket to investors who purchased at the initial offering. Under pricing of IPOs was observed, also there were no excess returns in the long run to investors who purchase the new issue in the aftermarket, supporting presence of fads and inefficient IPO market. From the findings it can be concluded that fad explanations or mass psychology affected excess returns and exist in the IPO market.