Effect Of Initial Public Offering On The Financial Performance Of Firms Listed At The Nairobi Securities exchange

Abstract

Initial Public Offering has been for a long time been of interest not just to the firms being listed but also to the investors and the whole business community. This is so because of the many outcomes that firms do experience after issuing an IPO. This study aimed to determine the effect of Initial Public Offering on the financial performance of firms listed at the Nairobi Securities’ Exchange. It was guided by three specific objectives; to determine the effect of liquidity on the financial performance of firms listed at the NSE after issuing an IPO, to establish the effect of size on the financial performance of firms listed at the NSE after issuing an IPO and to find out the effect of financial risk on the financial performance of firms listed at the NSE after issuing an IPO. The study adopted Modigliani and Millers Theory of market capital structure as well as Efficient Market Hypothesis (EMH) by Eugene Fama. Past studies from different scholars unveiled the existing gap in literature pertaining to the market inefficiencies that firms face after issuing an IPO. The study however adopted descriptive research design and targeted 13 companies that had been in operation for a period of 10 years (2009-2018). It used census sampling technique in considering all the 13 targeted companies studied. Secondary data was sourced from the Nairobi Security Exchange database, Capital Markets Authority resource centre and individual companies’ published annual financial reports. The traditional profit theory was employed to formulate profit, measured by Return on Assets (ROA), as a function of size, liquidity ratio and financial risk ratio. The study adopted panel data analysis model to estimate the determinants of the profit function. The output was derived through the aid of STATA in the generation of the suitable model which was in the form of a panel regression model. A Prais Winsten Panel regression model (with corrected standard errors) that produces robust results was fitted as a result of the presence of heteroscedasticity and serial correlation in the variables. The Hausman test of the model specification which decides between fixed effect model and random effect model was not carried out due to violation of linear regression assumption due to the existence of significant differences of ROA among the firms. The empirical results revealed that there was a positively significant relationship between size and the return on assets. The results also revealed a positive insignificant relationship between size and the return on assets. It also concluded that financial risk had a negative significant relationship with the return on assets. The study recommended that more firms should be listed at the Nairobi Securities Exchange in order to improve on their transparency and investor confidence. Additionally, publicly listed firms should put in place liquidity management strategies and policies that should effectively govern them therefore resulting to better and improved returns. Financial risk administration policies should not be ignored as well since they would contribute greatly to the financial performance of firms listed at the Nairobi Securities Exchange