Abstract
During the period 1994 to 2020, a total of 18 firms in Kenya floated 16,530,781,060 shares at the Nairobi Securities Exchange (NSE) under Initial Public Offerings (IPOs) raising over Kshs 91 billion. These stocks were significantly over-subscribed with the highest hitting 830%. The NSE became fully automated in 2006. Similarly, in Africa between 2010 and 2019 there were a total of 215 IPOs raising over Kshs 1.6 trillion. This could be explained by divergence of opinion hypothesis. The initial returns were positive. However, in the long run, most of the firms underperformed. This under performance leads to losses incurred by investors and possible collapse of brokerage and investment firms leaving investors with a bitter taste. This study will undertake to establish the effects of firm specific factors on IPO stock performance at the NSE in Kenya. The specific objectives will be: to establish the effect of firm size on performance of IPO stocks at the NSE in Kenya, to determine the effect of age of firm on performance of IPO stocks at the NSE in Kenya, to evaluate the effect of firm board composition on performance of IPO stocks at the NSE in Kenya, to establish the effect of firm ownership structure on performance of IPO stocks at the NSE in Kenya, and to analyze the moderating effect of automation on the firm specific factors and performance of IPO stocks at the NSE in Kenya. The study will be built upon major theoretical streams: Random Walk theory, Winners curse theory, Dow Theory, Signaling theory and Agency theory and contextualize them to firm specific factors and performance of IPO stocks. More studies have previously been undertaken on the pricing of IPO at the NSE in Kenya and the few that studied on performance of IPO stocks at the NSE in Kenya have provided mixed findings depending on the methodology used. None of the studies as far as research has shown have considered the automation of NSE in Kenya as a moderating effect of performance of IPO stocks. The sample size will be the same as population of 18 IPO firms between 1994 and 2020 with 8 IPOs during pre-automation and 10 IPOs post-automation period. This will be a longitudinal and event study that will adopt a descriptive study design. Data will be analyzed using the Econometric Views (Eviews). Hausman test, Augmented Dickey Fuller (ADF) test and other diagnostic tests will be applied to the panel data. The Capital Assets Pricing Model (CAPM) and the Nairobi 20 Share Index will be used as the benchmarks of performance of IPO stocks.
Highlights
More studies have previously been undertaken on the pricing of Initial Public Offerings (IPOs) at the Nairobi Securities Exchange (NSE) in Kenya and the few that studied on performance of IPO stocks at the NSE in Kenya have provided mixed findings depending on the methodology used
Mburugu (2016) stated that an entity that desires to initiate an IPO in Kenya has to first obtain the authorization from Capital Markets Authority (CMA) before it can carry out an IPO
Munisi (2017) examined the difference in financial performance before and after Initial Public Offerings (IPOs) in companies listed on Dar es Salaam Stock Exchange (DSE) in Tanzania whereby the company financial performance was measured using financial performance ratios revealed that there is significant difference between pre-IPOs and post-IPOs financial performance with significant increase of post-IPOs financial performance
Summary
A stock exchange is established to maintain active trading which increases the liquidity or marketability of shares, help fix share prices that arise through transactions that flow from investors demands and suppliers preferences, ensure safe and fair dealing through rules, regulations and by-laws established, aid in financing the economy through negotiability and transferability of the securities, dissemination of information through various publications, and lastly act as a performance inducer since prices of stocks reflect the performance of traded companies (Joshi, Sabhaya, & Pandya, 2013). The long term finance can be achieved through IPO listing which is a method of raising funds through the issue of shares to investors in a primary market by companies (Joshi et al, 2013). Through the IPO process, new companies in the capital markets make the public issue for the first time. Such issues are floated through prospectuses, book building, private placements, bought out deals and rights issues. IPOs offer opportunities for firms to diversify ownership, use stock markets as an exit strategy for mature businesses and raise funds for investment (Marc, Khurshed, & Mudambi, 2007 as cited in Osei, Adjasi, & Fiawoyife, 2012). A person offers securities to the public in Kenya if, to the extent that the offer is made to persons in Kenya, it is made to any section of the public, whether selected as members or debenture holders of a body corporate, or as clients of the person making the offer, or in any other manner, is to be regarded as made to the public; and the terms “public offer” and “public offering” shall be construed (Government of Kenya, 2002). Mburugu (2016) stated that an entity that desires to initiate an IPO in Kenya has to first obtain the authorization from Capital Markets Authority (CMA) before it can carry out an IPO
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