The Initial and Aftermarket Performance of Ipos: Evidence From the Nairobi Stock Exchange

Abstract

An initial public offering (IPO) occurs when a security is sold to the general public for the first time, with the expectation that a liquid market will develop. Most companies start out by raising equity capital from a small number of investors, w ith no liquid market existing if these investors wish to sell their stock. The performance of IPOs, is therefore important to attract the investors to the market. The initial under-pricing of IPOs is a common phenomenon in every stock market, with the amount of under-pricing, and reasons for under-pricing differing from one market to another. The purpose of this study was to determine the initial and aftermarket performance of IPOs on the Nairobi Stock Exchange (NSE). The study examines 7 Kenyan IPOs issued on the NSE from 1998 to 2008. It uses descriptive statistics to measure the performance of these IPOs. The initial return on the first day of trading is calculated using the Market Adjusted Initial Return (MAIR) whereas the performance over the 12 month period is calculated using the Cumulative Average Return. On the first day of trading, an average Market Adjusted Initial Return of 59.69% was reported and a Cumulative Average Return (CAR) of 1.05% was reported at the end of the one year period. This shows a decline in returns over a longer period of trading of the share. The initial underpricing on the first day of trading is consistent with international evidence where new issues consistently find excess returns in the short-run.