Long-term Performance Of Initial Public Offerings At Nairobi Securities Exchange Market, Kenya

Abstract

The empirical evidence accumulated during recent years for every capital market in the world is devious in its conclusion that initial Public Offering (IPO) provides significant abnormal returns on their first day of trading, which is then followed by a considerable underperformance that extends beyond one year. Various studies that underperformance of IPOs extends beyond the first year of trading. This paper investigates the long-term (from one year through to five years) returns of IPOs listed in the Nairobi Securities Exchange (NSE) market in order to provide a more recent case of performance of IPOs in Kenya. A total number of 7 IPOs listed and traded in the NSE for a period of five years starting from 2006 to 2013 were thoroughly analysed. The long-term performance of IPOs was estimated by computing the returns using the Cumulative Abnormal Return (CAR) on the 7 IPOs as individual stocks as well as a portfolio for a period of 60months after the IPO issue. Further computation was done using the Buy and Hold Abnormal Return (BHAR) over similar period. The NSE 20 Share Index was used as a benchmark to gauge the IPO performance in the same economic conditions environment. There are many factors that lead to the underperformance of IPOs. The literature provides theories which investors have continuously ignored and gone ahead to invest only for the issuers to take advantage of insider information. Future investment through IPOs is reduced due to the continued underperformance of such stocks, ending up being a hard lesson to the investors. The findings in this paper indicate that underperformance of IPOs undoubtedly continue beyond one year. However, underperformance is not evident in all IPOs but when taken as a portfolio, the underperformance is more discernible. IPOs issued during the hot period tend to have a too high first aftermarket pricing which then leads to continued underperformance several years after issue. The fads theory cannot be ignored since the benchmark performance appears to follow the long-term performance of IPO portfolio in the period covered by the study.