The subscription rate of initial public offering`s and the long term performance in the after Market at the Nairobi Securities Exchange
The Nairobi securities exchange has witnessed an increase in the number of companies having initial public offerings. Most of these IPO`s have generated a lot of interest and excitement from investors leading to them being oversubscribed, meaning that the investor demand for shares offered during an IPO exceeded the number of shares being offered by companies. The reason why there is great demand for the shares on offer during IPO`s could be linked to investor`s expectations. Investors expect the securities offered during IPO`s are going to bring positive returns in future. This return is measured by an appreciation of the share price and the dividends received. In investing investors have different investment horizons, some investors have a short term investment horizon others medium, and for others a long term investment horizon. The focus of this study is on the long term investing for a period of three after the IPO and the returns after the three year period. The study looks at the relationship between the investor demand for IPO`s which is the subscription rate and the long term return of shares given by the difference between the offer price and the price of the shares three years later plus the dividends received for the period 1992 to 2009 at the Nairobi securities exchange. The findings are that, IPO`s in Kenya are usually oversubscribed driven by investors who are over optimistic about the performance of the shares at the NSE. From the study the subscription rate of the sample is 272.49%. In the sample of study, seventeen IPO`s are oversubscribed; two are fully subscribed while three are undersubscribed. The long term returns from the study are 37.5%. Long term period is defined as a period longer than thirty six months. Fourteen IPO`s have positive long term returns, while eight IPO`s have negative long term returns. Twelve of the seventeen IPO`s which are oversubscribed have positive returns while five have negative returns. The fully subscribed all have negative returns while a third of the undersubscribed offerings have negative returns; hence an oversubscribed seasonal offering is more likely to give a positive return than an undersubscribed and fully subscribed offering. Over the long run there is a weak positive relationship between the subscription rate and the long term returns. The subscription rate is a poor predictor of the expected returns over the three year period. There is only a slight difference between the three year returns and the first day returns with the three year returns being slightly higher than the first day returns. There is wide variation in the returns of individual IPO`s and even the subscription rates of IPO`s. To an investor IPO`s produce both positive and negative returns in the long run with the positive returns being more than half of the sample at 63.64%. Hence IPO`s are more likely to produce a positive return over the three year period than negative returns factoring in capital gains and dividends received during the period; thus investors should hold on to the securities.