The relationship between introduction price and market price of companies listed at the Nairobi Stock Exchange

Abstract

This study sought to establish the relationship between introduction price and market price of shares listed by way of introduction at the NSE. When a firm is applying for a listing, two basic concerns come to mind. At what price to value the shares; and whether the issue will attract a sustainable market demand. In today's Kenyan market, introduction prices are predetermined without formal consideration to market forces of demand and supply.

A descriptive survey design was used to meet the objectives of this study. Secondary data was collected for all the companies that had listed through introduction since the regulations became effective. The data included market prices for the first month of trading following the listing. Data analysis was done by use of descriptive statistics and a test for linearity applied to determine the relationship of the collected data.

The results show a significant difference between the introduction price and market price with a gradual increase or decrease in market prices in each case. A linear relationship was established based on the price patterns for all the three scenarios. However, one of the limitations of the study was the small number of firms that have listed by introduction.

The researcher recommends that introduction prices should be set objectively to ensure investors have a reliable basis for making investment decisions. The market regulator should require the company through its Directors and the team of advisors involved in the valuation and setting of the price to take responsibility for the published valuations and prices.