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 Africabetween 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 underperformance 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
References
[1]
Achua, K. (2011). The Dynamics of Initial Price Offerings in Deregulated Emerging African Capital Markets. African Journal of Accounting Economics Finance and Banking Research, 7, 14-35.
[2]
Africa Capital Markets Watch (2019). www.pwc.co.za/capitalmarketswatch
[3]
Agarwal, S., Liu, C., & Rhee, S. G. (2008). Investor Demand for IPOs and Aftermarket Performance: Evidence from the Hong Kong Stock Market. Journal of International Financial Markets, Institutions and Money, 18, 176-190.
https://doi.org/10.1016/j.intfin.2006.09.001
[4]
Allen, F., & Faulhaber, G. (1989). Signaling by Underpricing in the IPO Market. Journal of Financial Economics, 23, 303-324. https://doi.org/10.1016/0304-405X(89)90060-3
[5]
Alvarez, S., & Gonzalez, V. M. (2001). Long-Run Performance of Initial Public Offerings (IPOs) in the Spanish Capital Market. Journal of Financial Economics, 38, 5-18.
https://doi.org/10.2139/ssrn.274086
[6]
Arrow, K. (1971). Essays in the Theory of Risk Bearing. Chicago, IL: Markham.
[7]
Barber, M., & Lyon, D. (1997). Detecting Long-Run Abnormal Stock Returns: The Empirical Power and Specification of Test Statistics. Journal of Financial Economics, 43, 341-372. https://doi.org/10.1016/S0304-405X(96)00890-2
[8]
Baron, D. (1982). A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues. The Journal of Finance, 37, 955-976.
[9]
Bazerman, M., & Samuelson, W. (1983). I Won the Auction But Don’t Want the Prize. Journal of Conflict Resolution, 27, 618-634.
https://doi.org/10.1177/0022002783027004003
[10]
Beatty, P., & Ritter, J. R. (1986). Investment Banking Reputation and Underpricing of Initial Public Offerings. Journal of Financial Economics, 15, 213-232.
[11]
Bereby-Meyer, Y., & Grosskopf, B. (2008). Overcoming the Winner’s Curse: An Adaptive Learning Perspective. Journal of Behavioral Decision Making, 21, 15-27.
https://doi.org/10.1002/bdm.566
[12]
Bird, R. B., & Smith, E. A. (2005). Signaling Theory, Strategic Interaction, and Symbolic Capital. Current Anthropology, 46, 221-248. https://doi.org/10.1086/427115
[13]
Bodie, Z., Kane, A., & Marcus, J. (2009). Investment (8th ed.). New York, NY: McGraw Hill.
[14]
Bouman, S., & Jacobsen, B. (2002). The Halloween Indicator, “Sell in May and Go Away”: Another Puzzle. American Economic Review, 92, 1618-1635.
https://doi.org/10.1257/000282802762024683
[15]
Brau, J., Lambson, V., & McQueen, G. (2005). Lockups Revisited. Journal of Financial and Quantitative Analysis, 40, 519-530.
https://doi.org/10.1017/S002210900000185X
[16]
Brealey, R. A., Myers, S. C., & Allen, F. (2005). Corporate Finance (8th ed.). New York, NY: McGraw-Hill Irwin.
[17]
Brigham, E. F., & Ehrhart, M. C. (2011). Financial Management: Theory and Practice (13th ed.). Mason, OH: South-Western Cengage Learning.
[18]
Capital Markets Authority, CMA (2020). Capital Markets Authority, Kenya. Quarterly Bulletin.
[19]
Chemmanur, T. J. (1993). The Pricing of Initial Public Offers: A Dynamic Model with Information Production. Journal of Finance, 48, 285-304.
https://doi.org/10.1111/j.1540-6261.1993.tb04710.x
[20]
Chhabra, K. (2011). Pricing Performance of IPOs in India. Unpublished Thesis, Patiala: Punjabi University.
[21]
Chibeka, D. (2014). Effect of Initial Public Offering Pricing on Long Run Stock Returns of Companies Listed at NSE. Unpublished Master of Science Thesis. Nairobi: University of Nairobi.
[22]
Courteau, L. (1995). Under-Diversification and Retention Commitments in IPOs. Journal of Financial and Quantitative Analysis, 30, 487-517. https://doi.org/10.2307/2331274
[23]
Cox, J. C., & Isaac, R. (1984). In Search of the Winner’s Curse. Economic Inquiry, 22, 579-592. https://doi.org/10.1111/j.1465-7295.1984.tb00705.x
[24]
Creswell, J. (2003). Research Design: Qualitative, Quantitative and Mixed Methods Approaches (2nd ed.). Thousand Oaks, CA: SAGE Publications.
[25]
Cuthbertson, K., & Nitzche, D. (2004). Quantitative Financial Economics (2nd ed.). Chichester: John Wiley and Sons.
[26]
Dharan, B. G., & Ikenberry, D. L. (1995). The Long-Run Negative Drift of Post-Listing Stock Returns. The Journal of Finance, 50, 1547-1574.
https://doi.org/10.1111/j.1540-6261.1995.tb05188.x
[27]
Durcikova, A., & Gray, P. (2009). How Knowledge Validation Processes Affect Knowledge Contribution. Journal of Management Information Systems, 25, 81-108.
https://doi.org/10.2753/MIS0742-1222250403
[28]
Elton, E. J., Gruber, M. J., Brown, S. J., & Goetzmann, W. N. (2002). Modern Portfolio Theory and Investment Analysis. New York, NY: John Wiley and Sons.
[29]
Ernst and Young Global IPO Trends (2015) 2015 Quarter Two.
[30]
Esumanba, S., Kpanie, A., & Bawuah, B. (2015). Firm Specific Determinants of Underpricing on the Ghana Stock Market. International Review of Management and Business Research, 4, 336-342.
[31]
Eyster, E., & Rabin, M. (2005). Cursed Equilibrium. Econometrica, 73, 1623-1672.
[32]
Fama, E. F. (1965). The Behavior of Stock Market Prices. The Journal of Business, 38, 34-105. https://doi.org/10.1086/294743
[33]
Fama, E. F. (1980). Agency Problems and the Theory of the Firm. Journal of Political Economy, 88, 288-307. https://doi.org/10.1086/260866
[34]
Fama, E. F. (1998). Market Efficiency, Long-Term Returns, and Behavioral Finance. Journal of Financial Economics, 49, 283-306.
https://doi.org/10.1016/S0304-405X(98)00026-9
[35]
Fama, E. F., & Jensen, M. C. (1983). Separation of Ownership and Control. Journal of Law and Economics, 26, 301-325. https://doi.org/10.1086/467037
[36]
Fawaz, A. S., & Osama, A. T. (2015). Firm Characteristics and Long Run Abnormal Returns after IPOs: A Jordanian Financial Market Experience. International journal of Economics and Finance, 7, 109-122. https://doi.org/10.5539/ijef.v7n3p109
[37]
Frydman, C., & Jenter, D. (2010). CEO Compensation. Annual Review of Financial Economics, 2, 75-102. https://doi.org/10.1146/annurev-financial-120209-133958
[38]
Gasbarro, D., Bundoo, S., & Zumwalt, J. K. (2003). Underpricing and Aftermarket Performance of IPO Firms in Mauritius. Journal of Emerging Market Finance, 2, 315-335.
https://doi.org/10.1177/097265270300200303
[39]
Gatumo, M. (2017). What Influences Short Run Performance of Initial Public Offerings in Kenya. Journal of Business and Management, 19, 29-31.
https://doi.org/10.9790/487X-1905062931
[40]
Gompers, P. A., & Lerner, J. (2003). The Really Long-Run Performance of Initial Public Offerings: The Pre-NASDAQ Evidence. The Journal of Finance, 58, 1355-1392.
https://doi.org/10.1111/1540-6261.00570
[41]
Government of Kenya (2002). Legal Notice No. 60. Nairobi: Government of Kenya.
[42]
Hearn, B. (2011). The Impact Of Corporate Governance Measures On The Performance Of West African IPO Firms. Emerging Markets Review, 12, 130-151.
https://doi.org/10.1016/j.ememar.2011.02.004
[43]
Hirshleifer, D. (2001). Investor Psychology and Asset Pricing. Journal of Finance, 56, 1533-1597. https://doi.org/10.1111/0022-1082.00379
[44]
Ibbotson, R. G. (1975). Price Performance of Common Stock New Issues. Journal of Financial Economics, 2, 232-272. https://doi.org/10.1016/0304-405X(75)90015-X
[45]
Isnurhadi, S. A. K., Umar, H., Diah, N., & Herianto, P. (2008). The Analysis of Short Run and Long Run Performance of Privatization Initial Public Offerings in Malaysia. In 8th Global Conference on Business and Economics (pp. 1-38). Florence: University of Florence.
[46]
Jensen, M., & Meckling, W. (1976). Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure. Journal of Financial Economics, 3, 305-360.
https://doi.org/10.1016/0304-405X(76)90026-X
[47]
Joshi, Y., Sabhaya, R., & Pandya, H. (2013). Are IPOs Underpriced? Empirical Evidence from India. Pacific Business Review International, 6, 80-89.
[48]
Kanja, J. (2014). Effect of Initial Public Offerings on the Stock Returns of Companies Listed at the NSE. Unpublished MSc Finance Project, Nairobi: University of Nairobi.
[49]
Karanovic, G., & Karanovic, B. (2016). IPOs Performance Analysis: Evidence from Emerging Markets in the Balkans. Scientific Annals of Economics and Business, 63, 381-389. http://dx.doi.org/10.1515/saeb-2016-0129
[50]
Kendall, M. G. (1953). The Analysis of Economic Time Series: Part I: Prices. Journal of Royal Statistical Association, 116, 11-34. https://doi.org/10.2307/2980947
[51]
Kiluku, L. (2014). The Relationship between Initial Public Offer Price and the Post Listing Market Price at the NSE for Listed State Owned Enterprises. Unpublished these of Master of Science in Finance, Nairobi: University of Nairobi.
[52]
Kinyua, J., Nyanumba, P., Gathaiya, R., & Kithitu, J. (2014). Effects of IPO on Performance of Companies Quoted at NSE. International Journal of Management and business Studies, 3, 81-84.
[53]
Kirmani, A., & Rao, A. R. (2000). No Pain, No Gain: A Critical Review of the Literature on Signaling Unobservable Product Quality. Journal of Marketing, 64, 66-79.
https://doi.org/10.1509/jmkg.64.2.66.18000
[54]
Koech, C. (2011). Short-Run and Long-Run IPO Financial Performance for Firms Quoted at the Nairobi Stock Exchange. Unpublished Master of Business Administration Thesis, Nairobi: University of Nairobi.
[55]
Kombo, D. K., & Tromp, D. L. A. (2009). Proposal and Thesis Writing: An Introduction. Nairobi: Pauline’s Publications Africa.
[56]
Kooli, M., & Suret, J. (2004). The Aftermarket Performance of Initial Public Offerings in Canada. Journal of Multinational Financial Management, 14, 47-66.
https://doi.org/10.1016/S1042-444X(03)00038-0
[57]
Kothari, C. (2004). Research Methodology: Methods & Techniques (2nd ed.). New Delhi: New Age International Publishers.
[58]
Kothari, S., & Warner, J. B. (1997). Measuring Long-Horizon Security Price Performance. Journal of Financial Economics, 43, 301-339.
https://doi.org/10.1016/S0304-405X(96)00899-9
[59]
Lagoarde-Segot, T., & Lucey, B. M. (2008). Efficiency in Emerging Markets—Evidence from The MENA Region. Journal of International Financial Markets, Institutions and Money, 18, 94-105. https://doi.org/10.1016/j.intfin.2006.06.003
[60]
Lambert, R. A. (2001). Contracting Theory and Accounting. Working Paper, Philadelphia, PA: University of Pennsylvania. https://doi.org/10.2139/ssrn.235800
[61]
Lee, P. J., Taylor, S. L., & Walter, T. S. (1996). Australian IPO Pricing in the Short and Long Run. Journal of Banking and Finance, 20, 1189-1210.
https://doi.org/10.1016/0378-4266(95)00053-4
[62]
LeRoy, S. F. (1989). Efficient Capital Markets and Martingales. Journal of Economic Literature, 27, 1583-1621.
[63]
Levis, M., (1993). The Long-Run Performance of Initial Public Offerings: The UK Experience 1980-1988. Financial Management, 22.
[64]
Ljungqvist, A. P. (1997). Pricing Initial Public Offerings: Further Evidence from Germany. European Economic Review, 41, 1309-1320.
https://doi.org/10.1016/S0014-2921(96)00035-9
[65]
Lo, A. W., & MacKinley, A. C. (1999). A Non-Random Walk Down Wall Street. Princeton, NJ: Princeton University Press.
[66]
Loughran, T., & Ritter, J. R. (1995). The New Issues Puzzle. The Journal of Finance, 50, 23-51. https://doi.org/10.1111/j.1540-6261.1995.tb05166.x
[67]
Loughran, T., & Ritter, J. R. (2002). Why Don’t Issuers Get Upset about Leaving Money on the Table in IPOs? Review of Financial Studies, 15, 413-444.
https://doi.org/10.1093/rfs/15.2.413
Lyon, J., Barber, B., & Tsai, C. (1999). Improved Methods for Tests of Long-Run Abnormal Stock Returns. Journal of Finance, 54, 165-201.
https://doi.org/10.1111/0022-1082.00101
[70]
Madura, J. (2010). Financial Institutions and Markets (10th ed.). Mason, OH: Thomson South-Western.
[71]
Marc, G., Khurshed, A., & Mudambi, R. (2006). The Strategy of Going Public: How UK Companies Choose Their Listing Contracts. Journal of Business Finance and Accounting, 33, 79-101. https://doi.org/10.1111/j.1468-5957.2006.00657.x
[72]
Marc, G., Khurshed, A., & Mudambi, R. (2007). The Long-Run Performance of UK IPOs: Can It Be Predicted? Managerial Finance, 33, 401-419.
https://doi.org/10.1108/03074350710748759
[73]
Mburugu, S. (2016). Analysis of the Long Run Performance of Initial Public Offers and Effects in the Kenyan Stock Market. Unpublished Master of Science Project, Nairobi: University of Nairobi.
[74]
Miller, E. M. (1977). Risk, Uncertainty, and Divergence of Opinion. Journal of Finance, 32, 1151-1168. https://doi.org/10.1111/j.1540-6261.1977.tb03317.x
[75]
Miller, R. E., & Reilly, F. K. (1987). An Examination of Mispricing, Returns and Uncertainty for Initial Public Offerings. Financial Management, 16, 33-38.
https://doi.org/10.2307/3666001
[76]
Mitchell, M., & Stafford, E. (2000). Managerial Decisions and Long-Term Stock Price Performance. The Journal of Business, 73, 287-329. https://doi.org/10.1086/209645
[77]
Munisi, H. (2017). Financial Performance of Initial Public Offerings: Companies listed on Dar es Salaam Stock Exchange. Business and Economics Journal, 8, Article No. 302.
[78]
Muscarella, C. J., & Vetsuypens, M R. (1989). A Simple Test of Baron’s Model of IPO Underpricing. Journal of Financial Economics, 24, 125-135.
https://doi.org/10.1016/0304-405X(89)90074-3
[79]
Mushtag, K. (2016). Factors That Influence the Performance of IPO at the NSE in Kenya. Unpublished MBA Thesis, Nairobi: University of Nairobi.
[80]
Mutai, J. (2018). Effects of Firm Characteristics on the Post-IPO Performance by Listed Companies on the Nairobi Securities Exchange (NSE), Kenya. African Journal of Education, Science and Technology, 5, 160-170.
[81]
Mutai, J. (2019). Effects of IPO Timing on the Underpricing of Shares of Companies Listed on Nairobi Securities Exchange (NSE), Kenya. African Journal of Education, Science and Technology, 5, 111-121.
[82]
Mwendwa, M. (2014). Effects of IPO on Long Run Stock Price Performance of Companies Listed at the NSE. Unpublished Project. Nairobi: University of Nairobi
[83]
Neneh, B. (2013). Returns on Initial Public Offerings (IPOs) on the Johannesburg Securities Exchange (JSE): Success and Failure Patterns. Unpublished Thesis. Bloemfontein: University of the Free State.
[84]
Ng’ang’a, P. (2017). Effect of Ownership Structure on Financial of Companies Listed at the Nairobi Securities Exchange in Kenya. Unpublished Ph.D. in Business Administration (Finance), Kenya: Jomo Kenyatta University of Agriculture and Technology.
[85]
Obura, J., & Anyango, C. (2016). Moderating Effect of Interest Rates on relationship between Foreign Exchange Rate Fluctuation and Performance of Nairobi Securities Exchange Market. Universal Journal of Accounting and Finance, 4, 27-34.
https://doi.org/10.13189/ujaf.2016.040201
[86]
Omuchesi, J., & Bosire, M. (2014). The Effect of Automation on Stock Market Efficiency: A Case of Nairobi Securities Exchange. A Research Journal of Finance and Accounting, 5, 71-79. https://doi.org/10.9790/5933-0537179
[87]
Osei, K. A., Adjasi, C. K., & Fiawoyife, E. U. (2012). Underpricing of Initial Public Offerings on Africa Stock Markets: Ghana and Nigeria. Nairobi: The Africa Economic Research Consortium.
[88]
Panda, B., & Leepsa, N. (2017). Agency Theory: Review of Theory and Evidence on Problems and Perspectives. Indian Journal of Corporate Governance, 10, 74-95.
https://doi.org/10.1177/0974686217701467
[89]
Pepper, A., & Gore, J. (2012). Behavioral Agency Theory: New Foundations for Theorizing about Executive Compensation. London School of Economics and Political Science Research, 41, 1045-1068. https://doi.org/10.1177/0149206312461054
[90]
Philippe, E. (2012). IPO: A Global Guide (Expanded 2nd ed.). Hong Kong: Hong Kong University Press.
[91]
Ritter, J. (1998). Initial Public Offerings. Warren Gorham and Lamont Handbook of Modern Finance, 2, 5-30.
[92]
Ritter, J. (2011). Equilibrium in IPO Market. Annual Review of Financial Economics, 3, 347-374. https://doi.org/10.1146/annurev-financial-102710-144845
[93]
Ritter, J., and Welch, I. (2002). A Review of IPO Activity, Pricing and Allocations. Cambridge, MA: National Bureau of Economic Research. https://doi.org/10.3386/w8805
[94]
Roberts, J. (2010). Designing Incentives in Organizations. Journal of Institutional Economics, 6, 125-132. https://doi.org/10.1017/S1744137409990221
[95]
Rock, K. (1986). Why New Issues Are Underpriced. Journal of Financial Economics, 15, 187-212. https://doi.org/10.1016/0304-405X(86)90054-1
[96]
Ross, R. (2012). Off the Rails: Is Dow Theory Still Applicable to Today’s Market. Casey Research, 1-3.
www.caseyresearch.com/daily-dispatch/rails-dow-theory-still-applicable-todays-market
[97]
Sarra, B. S., Abdelkader, B., & Neila, B. T. (2011). Determinants of IPO Underpricing: Evidence from Tunisia. The International Journal of Business and Finance Research, 5, 13-32.
[98]
Simiyu, F., Mutunga, T., Barasa, F., & Matete, S. (2016). Effects of Initial Public Offerings on Long Run Performance of Stocks Listed on NSE Market. Quest Journals of Research in Business and Management, 4, 43-50.
[99]
Spence, M. (2002). Signaling in Retrospect and the Informational Structure of Markets. American Economic Review, 92, 434-459. https://doi.org/10.1257/00028280260136200
[100]
Spiess, D. K., & Affleck. J. (1995). Underperformance in Long-Run Stock Returns Following Seasoned Equity Offerings. Journal of Financial Economics, 38, 243-267.
https://doi.org/10.1016/0304-405X(94)00817-K
[101]
Teoh, S. H., Welch, I., & Wong, T. J. (1998). Earnings Management and the Long-Run Performance of Initial Public Offerings. Journal of Finance, 53, 1935-1974.
https://doi.org/10.1111/0022-1082.00079
[102]
Varaiya, P. (1988). The “Winner’s Curse” Hypothesis and Corporate Takeovers. Managerial and Decision Economics, 9, 209-219. https://doi.org/10.1002/mde.4090090306
[103]
Wamari, E. (2014). The Effect of Initial Public Offers on Long Run Stock Performance: Evidence from the Nairobi Securities Exchange. International Journal of Science and Research Publications, 4, 1-9.
[104]
Welch, I. (1989). Seasoned Offerings, Imitation Costs, and the Underpricing of IPOs. Journal of Finance, 44, 421-449. https://doi.org/10.1111/j.1540-6261.1989.tb05064.x
[105]
Wilson, R. (1968). On the Theory of Syndicates. Econometrica, 36, 119-132.
https://doi.org/10.2307/1909607
[106]
Wiseman, R., & Gomez-Mejia, L. (1998). A Behavioral Agency Model of Managerial Risk Taking. The Academy of Management Review Journal, 23, 133-153.
https://doi.org/10.5465/amr.1998.192967
[107]
Yaakub, N., Sherif, M., & Haniffa, R. (2018). The Post-Issue Market Performance of Initial Public Offerings: Empirical Evidence from Malaysian Stock Markets. Journal of Emerging Market Finance, 17, 376s-414s. https://doi.org/10.1177/0972652718798188
[108]
Zhang, Y., & Wiersema, M. F. (2009). Stock Market Reaction to CEO Certification: The Signaling Role of CEO Background. Strategic Management Journal, 30, 693-710.
https://doi.org/10.1002/smj.772
[109]
Zheng, X. F. S., Ogden, J. P., & Jen, F. C. (2002). Pursuing Value through Liquidity: Share Retention, Lockup and Underpricing in IPOs. Working Paper.
https://doi.org/10.2139/ssrn.338281
[110]
Zouari, S., Baldrige, A., & Taktak, N. (2011). Determinants of IPO Underpricing: Evidence from Tunisia. The International Journal of Business and Finance Research, 5, 13-32.
