Determinants of initial public offer underpricing: Evidence from Nairobi stock exchange

Abstract

Evidence of underpricing of Initial Public Offerings (IPOs) has spawned a considerable theoretical literature attempting to explain the apparent contradiction to market efficiency. This paper reassesses that evidence by examining a sample of 15 Kenyan IPO's for the period 1990- 2008. The study finds that the average initial market adjusted returns for the first three days of listing is about 64.3 percent. Statistical analysis indicates that the level of IPO underpricing in Kenya is related to listing delays, offer size, offer price, oversubscription rate and the type of issuer. It appears also that underpricing is driven by irrational investors (Ipoers) seeking for short -run capital gains.