The Effects of Secondary Equity Offering on Stock Returns of Firms Quoted on the Nairobi Stock Exchange

Abstract

Seasoned equity offerings are offerings of new shares in addition to a firm’s already existing shares. As equity offerings are essentially the least preferable from management perspective (pecking order hypothesis) of attracting cash, companies will only be inclined to do so when the benefits outweigh the costs. Issue of secondary shares to the market may cause reactions in the market activity. This study therefore sought to determine the effects of secondary equity offering on stock returns of firms quoted on the Nairobi Stock Exchange.

The objectives of the study were to determine the effect of announcement of secondary equity offerings on stock prices of firms listed on the NSE as well as to investigate the impact of the announcement on trading volume before and after the secondary issue. The study adopted an event study methodology as its research design. This design was used to identify companies that had issued secondary shares to the market. This led to the involvement of ten companies that had been listed in the NSE and had issued secondary shares. Secondary data was used for this study and it was collected from the Nairobi Stock Exchange in Nairobi.

The result of the study showed that the direction of share price and abnormal returns after the announcement was inclusive. The market reacted differently for different types of stocks. The abnormal returns were however so small and this meant that the details of a secondary issue or rights issue does not shock the market in a significant way. However the amount of shares traded was more at the post announcement period than in the pre announcement period for most companies involved in the study. This provided an explanation that the announcement had an effect in increasing the volume of trade.