Performance of Initial Public Offerings: A Case of the Nairobi Securities Exchange

Abstract

The purpose of the study was to determine the factors that influence the performance of Initial Public Offerings (IPOs) at the Nairobi Securities Exchange (NSE). The study was guided by the following research questions. Do macro-economic conditions affect the performance of IPOs at the NSE? Does investment community perception influence the performance of an IPO at the NSE? ·what are the initiatives adopted to maximize performance of IPOs at the NSE? The study used a desc1iptive research design. The design was appropriate in discovering and measuring cause and relationships among the variables tested. The study used a questionnaire to collect raw data from the respondents. The population for this study comprised estimated 1200 industry experts. The participating firms were selected from firms with offices within the Nairobi. A survey questionnaire was used to collect primary data between June 06, 2014 and June 24, 2014. Data was analyzed by use of descriptive statistics, cross tabulations and analysis of variance. The data was presented in tables and figures. The first research question sought to find out the weather macro-economic conditions affect the performance of IPO at NSE. The study indicated that interest rate; inflation rates; the exchange rate; the level of Government spending on infrastructural development and business suppo11systems affects the performance of IPOs. Finally availability of cash flow to invest in IPOs; the general economic performance and future prospects; tax regime; pe1formance of preceding IPOs and performance of stock market have also been identified as other macro-economic conditions that affect IPO pe1fonnance.The second research question sought to find out if investment community perceptions influence the performance of IPO at NSE. The study showed that a firm's political environment during election periods affects IPOs performance but it does not to the extent that firms seen to be having connection with the country's political leadership perform better during IPOs. It also doesn’t affect to the extent that that a firm's political connection influences its ability to be granted approval to engage in equity offering. The study has also shown that investors ' behavior in terms of investor confidence, greed and fear; investors ' reactions towards national economic growth rates; general macroeconomic stability and the

functioning and efficiency of local markets normally affects performance of IPOs at NSE. The study also showed that despite that rules and regulations pertaining to the entry and operations of foreign investors have affected performance of IPOs listed at NSE, this opinion is only expressed by the respondents' from the insurance forms; those form the N SE; fund managers and bankers. High levels of neutrality create none conclusively on the opiruons of investment analysts and stock brokers on the matter. Likewise there is lack of empirical evidence to indicate whether taxes on capital gains have affected performance of IPOs listed at NSE and whether law on regulations of stock markets has affected performance of IPOs listed at NSE. The third research question sought to identify the initiatives adopted to maximize performance of IPO at the NSE. The study showed that firm affiliations; technological innovation is being used to enhance IPO performance. Competition has also been used as strategy to enhance performance of IPOs since firms at NSE float IPOs at a time that they are performing better than their competitors in the industry to ensure better IPO performance but study indicates high level of disagreement that IPO listing is preferred by some firms at a time when competitors' profitability is low as a strategy to improve IPO pe1fonnance at the NSE. Fourthly the study showed that pricing is being used as strategy of enhancing IPO performance to the extent that low share unit prices have been used as strategy of enhancing IPO performance at NSE and that underpricing has been used as a strategy by certain firms to gain higher performance of IPO shares. The study further suggests provision of as much information as possible about the company; proper timing to coincide with high performance of the stock market; organizing for loans with partner banks; setting of low minimum limits and enhancing corporate social responsibility as other strategies for enhancing IPO performance at NSE. The study recommends business environmental analysis to aid in proper timing of the IPO listing towards achieving higher performance. The study also recommends research and understanding of investor community perception. Further the study recommends strategic alignment of the initiatives for enhancing performance of IPOs to the organizational objectives and the target investors to achieve higher performance. Finally studies on the other factors, industry, firm characteristics would be welcome to enrich the findings.