An Analysis of the Long-run Performance of Initial Public Offers and Effects in the Kenyan Stock Market

Abstract

IPO is when a private firm offers or sells its stocks to the general public. It involves a process where entities or firms resolve to modification from a private entity or firm to a public entity. The pricing behavior of IPOs has been one of the great mysteries of modern corporate finance. The general objective of the study was to investigate the long-run performance of Initial Public Offerings (IPOs) and effects in the Kenyan stock market. NSE is presently the sole exchange in Kenya with 64 listed companies in 2016. It is also among the most vibrant in Africa and the leading in Eastern Africa. The study used descriptive survey research design. The target population for the study was 64 listed companies. Six companies which issued IPOs between 2007-2014 where considered from the population. Data used was purely secondary data from the NSE website and individual company websites. Collected data was analyzed using Mean Adjustment Buy Hold Returns and Cumulative Abnormal Returns and a test of significance at 95% confidence level. The results were presented in form of tables and figures for ease of understanding. The finding indicated that using MABHR methodology IPOs over performed the market by 0.17%. Co-Operative Bank Ltd, BRITAM and Home Afrika over performed the market by 0.20% 0.40% and 1.12% respectively for the long-run. Access Kenya Group, Kenya RE and Safaricom underperformed the market in 60 months of trading by -0.13%, -0.14%, and -0.44% respectively. Using CAR methodology IPOs underperformed the market by 0.49%. Access Kenya and Co-Operative Bank Ltd overperformed the market by 0.61% and 1.04% respectively for the 60 months of trading. Kenya Re, Safaricom, BRITAM and Home Afrika underperformed the market in the long-run by -0.33%, -1.41%, -1.09 and -1.76% respectively. The MABHR t-test results show that there was a significant difference between the short-run and long-run of Co-operative and Home Afrika and insignificant MABHR t-test between the short-run and the long-run of Access Kenya, Safaricom, Britam and Kenya Re. Further, CAR t-test results show that there was a significant difference between the short-run and long-run of Access Kenya, Kenya Re and Britam and insignificant CAR t-test results between the short-run and the long-run of Co-operative Bank, Safaricom and Home Afrika. The study recommended implementation of policies by the NSE management so as to have improved performance of IPOs in the long-run. In particular, it recommended enactment of policies regulating the number of shares being issued by firms and the subscription levels of the IPOs as these were found to have and inverse relationship with IPO performance in the long-run. It also recommends that companies put in place strategies to ensure continued performance of their shares in the long-run even as they expand