An Analysis of the Long-Run Performance IPOs and Effects in the Kenyan Stock Market

Abstract

Listing of a company in the securities exchange has been observed to be followed by underpricing in the first day and long term period of underperformance in terms of pricing in the subsequent days. Consequently, there has been a considerable curiosity from stakeholders, investors and academics to comprehend the assessments of why companies go public and the issues surrounding the short and long-run performance of newly issued equities. Underpricing is necessary to induce uninformed investors to participate in IPO offering when faced with adverse selection from informed investors. This often leads to first day price not reflecting a fair value of the IPO. The objective of the study was to determine the long-run performance IPOs and effects in the Kenyan stock market for the period 2007-2014. A descriptive survey research design was employed in the study. The population of the study encompassed all the 64 listed companies at the NSE as at 2016. The study employed a non-probability purposive sampling technique. Data collected for this study was secondary data obtained from NSE website, NSE price lists and the Central Bank of Kenya website for the period 2007 to 2014. The data obtained was analyzed using Statistical Package for Social Science (SPSS). Mean Average Buy and Hold Returns (MABHR), Abnormal Returns (AR) and Cumulative Abnormal Returns (CAR) were used to calculate the performance of the stocks. T-statistic for CAR was computed to the test for its significance. T-test was conducted at 95% confidence level to find if MABHR and CAR were statistically significant after IPOs announcement.