Market reaction to planned change in capital structure: public offers as proxy for change in capital structure-evidence from Nairobi stock exchange
Mulievi, J B
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This study has two broad aims, to test the existence of a relationship between capital structure and firm value using IPO as a proxy for capital structure on Nairobi Stock Exchange and, to analyze the behavior of firm share prices three months after IPO, and three months after and before SEO. Correlating EPS, MPS and net total earnings with debt ratio, a strong relationship was found to exist between capital structure and firm value for the twenty firms that were analyzed in this study. An evaluation of mean performance of firms, before and after IPO using EPS, MPS, total assets, equity, net total earnings, and total liabilities did not reveal a significant difference between firm value before and after IPO, using student t test at 95% level of significance. This contradiction was found to have been caused by lack of change in debt ratio. The absence of significant change in debt ratio was occasioned by the finding that firm increase their debt financing along with issuance of additional shares . IPO was found to have been underpriced, overpriced, or just well priced (two cases). They were followed by turbulent, favorable or unfavorable price reaction which lasted not more than 30 days. After which the share prices stabilized to a steady constant price decline, incline or constant for up to 90 days. By the 90th day, the market would have attained initial offer price if it was well priced. The study therefore finds that the market normalizes prices within 90 days. SEO was found to have information content. The information was found to undesirable when a firm makes a second or a third public offer. Except for one case, both announcement and actual SEO was followed by declining prices.
University of NairobiSchool Of Business, University Of Nairobi
planned change in capital structure
proxy for change
Nairobi stock exchange