Isaac Scientific Publishing

Journal of Advances in Economics and Finance

Microeconomic Firm Characteristics and Long Run Returns: The Case of Firms That Issued Equity at Nairobi Securities Exchange

Download PDF (318.9 KB) PP. 53 - 65 Pub. Date: November 30, 2020

DOI: 10.22606/jaef.2020.54002

Author(s)

  • Martin Khoya Odipo*
    Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
  • Tobias Olweny
    Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
  • Oluoch Oluoch
    Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya

Abstract

This study looks at micro-economic determinants of long run performance of shares issued in Nairobi Securities Exchange from 1st Jan. 2007 to 31st Dec.2013. Do these selected microeconomic determinants have statistically significant effects on long run return on equity issued in the Nairobi security exchange in Kenya? The study has a total 12 firms that issued shares in the security exchange during this period. In order to achieve the objectives of the study “a calendar study” approach on the issued shares was adopted. Monthly average returns were calculated for a period of 5 years. Nine hypotheses were deduced and executed. Three were based on benchmarks namely: Nairobi Securities Exchange Index (NSEI), Capital Asset Pricing Model (CAPM) and Matching Firms (MF). Along with the 3 mentioned measurement models, other 6 micro-economic variables were incorporated in the study; firm size, offer size, stock turnover, book/ market ratio, age and quality of underwriter. A panel data multi-regression and single regression analysis were run to examine the relationship between average return and micro-economic determinants on firm performance in the long run. The results of the study showed that the study corresponds with some of results of the previous studies with regard to the long run returns of either under or over performance. The level of under of over performance based on the benchmarks used were that NSEI and Matching firms performed better than firms that issued equity. However firms that issued equity performed better than CAPM as bench mark. The study also revealed that two explanatory variables; Age and Quality of underwriter were statistically significant as determinants of long run performance. Finally two independent variables were found to have positive influence on firms that issued equity in the NSE. In conclusion this study confirmed the results of previous studies done either supporting certain variables as determinants of long run return or do not support certain variables as determinants of long run return.

Keywords

public offerings, long run return, firm characteristics, initial public offering, seasoned equity offering, share issue privatization.

References

[1] 1. Ahamad-Zaluki, N., & Lim, B.K. (2012). “The Investment performance of Mesdaq market Initial public offering,” Asian Academy of management Journal of Accounting and Finance8:1, 1-23.

[2] 2. Aiyar, S., Calomiris, C.W. & Wieladek, T. (2014) “Does Macro-Prudential Regulation Leak? Evidence from a UK policy Experiment” Journal of Money, Credit and Banking Vol. 46 (1) 181-214.

[3] 3. Al-Shawawreh, F., & Al-Tarawneh, O. (2015). “Firm Characteristics and long run abnormal returns after IPOs: A Jordanian Financial Market Experience,” International Journal of Economics and Finance

[4] 4. Alvarez, S. (2015) “Pricing IPOs: An Approach for Spanish firms,” Journal of Finance and banking Management, 3 (1) 60-76.

[5] 5. Autore, M., Bray, D.E. & Peterson, D.R. (2009) “Intended use of proceeds and the long run performance of seasoned equity issues,” Journal of Corporate Finance Vol. 15 (3) 358-367.

[6] 6. Belghitar, Y., Dixion, R. (2012) “Do venture Capitalists reduce underpricing and underperformance of IPOs,” Applied Economics Vol. 22 (1) 33-44

[7] 7. Berk, J. (1995) “A critique of size related anomalies,” Review of Financial studies (8)275- 286.

[8] 8. Bessembinder, H. & Zhang. F. (2013) “Firm Characteristics and long run stock return after corporate event,” Journal of Financial Economics Vol. 109, (91) 83- 102

[9] 9. Brau, J.C., Couch, R.B., & Sutton, N.K. (2012) “The desire to acquire and IPO long run under performance,” Journal of Financial and Quantitative Analysis 47 (3) 391-413.

[10] 10. Brav, A., & Gompers, P.A. (1997). “Myth or Reality? The long run under performance of initial public offerings: Evidence from venture and non-venture capital backed companies,” Journal of Finance 52, 1791-1821

[11] 11. Cai, X., Liu, G. & Mase, B. (2008) “Long run performance of initial public offerings and its determinants: The case of China,” Review of Quantitative Finance and Accounting 30 (4) 419-432.

[12] 12. Capstaff, J. & Flettcher, J. (2011) “Long term performance and choice of SEO method by U.K. firms,” Journal of Business Finance and Accounting Vol.38: 1262-1289.

[13] 13. Chahine, S. & Filatotchev I.,(2008) “The effects of Venture Capitalist affiliation to under writer on short and long term performance in French IPOs,” Global Finance Journal 18 (3) 351-373.

[14] 14. Chen, V., Li, J., Shapiro, D. & Zhang, X. (2014) “Ownership Structure and innovation: An Emerging Market Perspective,” Asia Pacific Journal of Management 31, 1- 24

[15] 15. Choi, S.D.; Lee, I. & Megginson, W. (2010) “Do privatization IPOs out perform in the Long run?” Financial Management, spring 2010, 153-185.

[16] 16. Chordia, T., Roll, R., & Subrahmanyam, A. (2001). “Commonality in liquidity.” Journal of Financial Economics, 56, 3-28.

[17] 17. Corwin, S.A. (2003) “The Determinant of under Pricing for seasoned equity offers,” Journal of Finance Vol. LVIII, 5.

[18] 18. Corwin, S.A., & Schultz, P. (2005) “The Role of Underwriting Syndicate: Pricing, Information Production, and Underwrite Competition,” The Journal of Finance, Vol. LX No 1.

[19] 19. Dang, L., & Yang, J. J. (2007) The choice between rights and underwritten equity evidence from Chinese Stock Markets, Oregon State University, Unpublished, working papers.

[20] 20. Fama, E.F. 1970) “Efficient Capital markets: a review of theory and empirical work,” Journal of Finance Vol. 25 (2) 383-417

[21] 21. Fama, E.F (1976) “Efficient Capital markets,” Journal of Finance Vol.31 (1) 143-145.

[22] 22. Fama, E.F. (1998) “Market Efficiency, Long term Returns and Behavioral Finance,” Journal of Financial Economics, 49:283-306.

[23] 23. Giovannini, A., Mayer, C, Micossi, S., Di Noia, C., Onado, M., Pagano,M., and Polo, A. (2015) “Restarting European Long term investment Finance,” Green Paper Discussion Document. Center for Economic Policy Research (CEPR)

[24] 24. Graham, J.R., & Harvey, R. (2001). “The Theory and Practice of Corporate Finance: Evidence from the Field,” Journal of Financial Economics, Vol. 60: 187-243.

[25] 25. Gregory, A.; Cuermat, C. & Al –Shawawreh, F. (2010) “Long run returns, behavioral timing and pseudo timing,” Journal of Business Finance and Accounting 37 (5-6) 612-647.

[26] 26. IPOs and SEOs traded as American depository receipts: Does timing matter?” Journal of Asset Management, 263-271.

[27] 27. Jegadeesh, N. (2000) “Long –term performance of seasoned equity offering: Benchmark errors and biases in expectations,” Financial Management, Vol.29, 5-30.

[28] 28. Khurshed, A. (1999) “The long run performance of IPOs,” Managerial Finance 33, (6) 401-419.

[29] 29. Khushed, A. Mudambi, R. Goergen, M., (2007). “The long-run performance of UK IPOs: Can it be predicted?” Journal of Managerial Finance, Vol. 33, 6, 401-419.

[30] 30. Kooli, M. & Suret, J. (2004) “The aftermarket performance of Initial public Offering in Canada,” Journal of Multinational Financial Management 14 (1) 47-66

[31] 31. Kothari, S.P. & Shanken, J. ( 1997) “Book to Market, dividend yield and expected market return: A time series analysis,” Journal of Financial Economics 44, 169- 203.

[32] 32. Lee, I., Lochhead, S. Ritter, J., & Zhao, Q. (1996) “The cost of raising capital,” Journal of Financial Research 19, 59-74

[33] 33. Liu, J., Uchida, K., & Gao, R. (2012) “Political connections and the long term stock performance of Chinese IPOs,” Journal of International Markets, Institutions and money 22 (4) 814-833.

[34] 34. Liu, W. (2010) “Liquidity risk and asset pricing: Evidence from daily data over 1926- 2008,” Working Papers (Nottingham University Business School)

[35] 35. Loughran, T. & Ritter, J. (1995) “The new issues puzzle,” Journal of Finance, 50, 23-51

[36] 36. Lowry, M., Officer, M. & Schewert, G. (2008). The variability of IPOs Initial returns, Manuscript.

[37] 37. Lyon, J. D. Barber, B.M. &Tsai, C.L. (1999) “Improved methods for tests of long-run abnormal stock returns,” Journal of Finance, 54, 165-201.

[38] 38. McLean, R.D., Zhang, T, & Zhao. M. (2011) “How do firms issue shares? Evidence from around the World,” Working Papers University of Alberta

[39] 39. Merritt, C. (2017) Stock Market Turnover ratio. Economic Research Federal Reserve Bank of ST. Louis.

[40] 40. Minardi, A. M., Ferrariad, G.L., & Araujo-Travares, P.C. (2013) “Performance of Brazilian IPO back by private equity,” Journal of Business Research 66 (3) 448-455.

[41] 41. Mitchell, M.L. & Stafford, E. (2000) “Managerial decisions and long-term price Performance,” Journal of Business, 73, 287-329.

[42] 42. Pandey, I.M. (2015) Financial Management, 11th Edition- New Delhi

[43] 43. Pontiff, J & Schall, L.D. (1998) “Book to Market ratios as a predictor of market returns,” Journal of Financial Economics 49 (10) 141-160.

[44] 44. Ritter, J. (1991 “The Long run performance of initial public,” Journal of Finance 46, 3- 27

[45] 45. Schaub, M., & Highfield, M. J. (2004) “Short term and Long term performance of

[46] 46. Silva, A., & Bilinski, P. (2015) “Intended use of proceeds, underwriter quality and the long run performance of SEO in the UK.” Journal of Business Finance and Accounting Vol. 42, 1282-1309

[47] 47. Slovin, M., Sushka, M. & Lai, R. (2000) “Alternative Flotation Methods, Adverse Selection, and ownership Structures: Evidence from Seasoned Equity Issuance in UK” Journal of Financial Economics Vol.57 (2) 157-190

[48] 48. Spiess, D.K. & Affleck- Graves, J. (1995) “Underperformance in long run stock returns following seasoned equity offerings,” Journal of Financial Economics, 38, 243-267.

[49] 49. Su. C. & Bangasa, K. (2011) “The impact of under writer reputation on initial returns and long run performance of Chinese IPOs,” Journal of International Financial markets, Institutions and Money 18 (1) 117-141.

[50] 50. Suzuki, K. & Yamada, K. (2012) “Do the use of proceeds Disclosure and Bank Characteristics affect Bank underwriters Certification roles?” Journal of Business Finance and Accounting 39 (7-8)1102-1130.

[51] 51. Thomadakis, S. Nounis, C., & Gounopoulas, D. (2012) “Long term performance of Greek IPOs,” European Financial Management, Vol. 18, 1, 117-141.

[52] 52. Thomas, J., Jiao, Y. &Yew, (2011) “Institutional Trading, Information Production and the SEO Discount: A model of Seasoned Equity Offerings”, Journal of Economics and Management Strategy Vol. 20, 299-338.

[53] 53. Vithessonthi, C., & Tongurai, J. (2015) “The effect of firm size on the leverage- performance relationship during the financial crisis of 2007-2009,” Journal of Technology and Systems 1 (1) 18-39.