Effects of firm characteristics on the post-IPO performance by listed companies on the Nairobi Securities Exchange (NSE), Kenya
Initial Public Offerings (IPO) are companies offering their stock to the public market for the first time. Studies reveal that the post – IPO performance of most companies around the world is characterized by two elements: an abnormal increase in share price on the first day of trading and a long-run decline in performance. However, few studies have looked at the predictors of post – IPO performance of listed companies in Kenya. This study investigated the effects of firm characteristics on the post-IPO performance of the companies listed on the NSE. An explanatory survey design was adopted for the study, with firm characteristics (firm size, company risk, nature of ownership, and industry type) as the explanatory variable while first-day return, cumulative abnormal returns (CAR), return on assets (ROA) and return on equity (ROE) measured post – IPO performance. The target population of the study was 12 companies that had sold shares to the public between January 1996 and December 2013 and 54 other companies on the Stock Exchange, which were used to compute benchmarks (NSE-20 share index), against which the companies that had issued IPOs in the study were compared. The entire population (census) of the companies was used in the study. The study analysed company data (prospectuses and annual statements). In addition, daily stock share prices, volumes and NSE indices were collected from the NSE. The study found an average under-pricing of 55.36% and a median under-pricing of 24.71%, with all companies except one, having had its offer price under-priced. The average CAR, M= -0.98, SD=2.08, t (11) = -1.97, p<.05, and ROE, M= -10.07, SD=24.0, z= -1.96, p<.05, were significantly less in three years after an offering than in three before the offering, suggesting a decline in company performance after the offering. Firm characteristics were found to affect the performance of a company, with underpricing more significant in newer (more riskier) firms (rho= -.58, p<.05) while bigger firms experienced less CAR compared to smaller firms (rho= -0.37, p<.05). The study also found higher post-IPO ROE in companies owned by institutions rather than by individuals (rho=0.41, P<.05) and those in finance (rho=0.41, p<.05) compared to those in industrial and allied sector. The study recommends that investors looking for a long term investment should invest in IPOs of well established companies, bigger, institution owned companies, and those in finance and investment, if they want to maximize profits. On the other hand, short-term investors should consider investing in smaller and newer companies, since they have the greatest underpricing.
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