The Effect of Initial Public Offer Underpricing on Short-run Performance of Companies Listed at Nairobi Securities Exchange

Abstract

Underpricing is a variation between post issue price in a secondary market and offer price of a share on an initial public offering. Considerable evidence, from most of research conducted in various stock markets around the world; shows that those IPOs are on average underpriced. The study objective was to determine effect of IPO underpricing on short- run performance of the shares of firms that are listed at the NSE. The study adopted an event study model to study effects of IPO underpricing on short run performance of companies listed the Nairobi Securities Exchange. The period covered by the study was between the years 2006 – 2016 during which nine companies were listed at the N.S.E structured as IPOs. The study used secondary data sources to gather information relevant in achieving the research objectives. The study focused on 1-day, 3-day, 5-day, 7- day and 15-day cumulative abnormal returns (CAR) in order to evaluate the short-term performance. The research adopted the standard model for calculating underpricing of new issues and market index as the benchmark for the return of stocks at the NSE. The results on the mean adjusted short run performance established that the mean adjusted short run performance in day 3 were negative but positive in day 5, day 7 and Day 15. The study also found that the average abnormal returns were positive in day 3 and day 5 but negative abnormal returns in day 7 and 15. The finding revealed also revealed that there was no significant variability between IPO underpricing and short-run performance of companies listed at the Nairobi Securities Exchange. The study concluded that there is a short-run underperformance of IPOs underpricing at the Nairobi Securities Exchange. Additionally, the study concluded that there is an insignificant variability between IPO underpricing and short-run performance of companies listed at the Nairobi Securities Exchange. The study recommended that various policy-making organizations like the capital markets authority and the NSE should come up with effective policies on initial public offerings to ensure that IPOs are priced correctly.