Investigation of Determinants of Direct Flotation Costs of Public Securities Offerings in Kenya

Abstract

This study seeks to examine factors influencing direct flotation costs for public issuance of securities in Kenya’s capital markets since no benchmark exists that potential issuers can utilize for estimating flotation expenses. The research seeks to identify the quantum as well as understand the effects of offer size, offer method, underwriter (lead transaction advisor) reputation, market segment, offer complexity and firm size on flotation costs. Secondly, it seeks to develop a flotation cost function that can be applied to estimate direct flotation costs. Finally, it seeks to understand whether the flotation cost, certification and market power hypothesis are pertinent in Kenya’s securities markets. The study adopts a quantitative approach consisting of univariate analysis, as well as hypothesis testing using bivariate and multivariate regression, applied on a longitudinal panel dataset for public issues between 2007-2019. The study finds that the mean and trimmed mean for flotation cost as a percentage of offer size is 3.4% and 3.1% of offer size, with a median of 2.98% for the review period. The correlations show that offer size has the highest correlation to flotation cost with (0.610), followed by firm size at (0.521), offer complexity with (0.411), market segment at (0.246), underwriter experience with (0.175) and offer method with (-0.143). The results indicate all predictor variables have a positive correlation with flotation cost ranging from strong - weak except offer method with a weak negative correlation. The bivariate regression results indicate that offer size, firm size, offer complexity and market segment have significant influence on flotation costs for securities offerings. However, offer method and underwriter reputation have no significant influence on flotation costs. The regression results for the combined effect of the overall model are significant where p value is 0.000. This confirms that predictor variables in the model have a significant combined effect on flotation cost. The study also found clear evidence in favor of the economies of scale view and certification hypothesis.