Determinants of subscription levels during Initial Public Offferings (IPO’s) of East African listed firms

Abstract

An initial public offer enables a firm to transit from private ownership to public ownership. This was a cross sectional study of the factors that influence the uptake of IPOs in the East African region comprising of Kenya, Tanzania, Uganda and Rwanda on their respective Securities Exchanges. The study sought to establish what factors determine subscription levels during Initial Public Offerings (IPOs) of firms in the East African region. This study used descriptive research design and multiple regression analysis to determine key determinants of the level of subscription during IPOs. The period of the study was between 1990 and 2018 with a sample 47 firms, with 34 firms having their IPOs oversubscribed, 11 firms reported an under subscription while 2 firms attained a full subscription. To corroborate the results, questionnaire data obtained the transactional advisors perspective on the same. The factors that were considered for this study were: offer price, par value, post issue promoter holding, past performance, age of the firm, length of offer period and investor participation. The study found that offer price, past performance and investor participation were statistically significant hence they were significant determinants of the subscription levels. However, par value, post issue promoter holding, age of the firm and the length of offer period were not statistically significant therefore they did not influence subscription levels. The study further made a distinction between Privatized Initial Public Offerings (PIPOs) and private Initial Public Offerings. PIPOs are firms where the government is offloading its share ownership to the general public while private IPOs are fully private firms that are going public. A comparative analysis was then made to establish whether investors prefer state owned firms or private firms. The findings revealed that there was no statistically significant difference on the subscription levels between an offer for sale by the Government and a private offer. Since the study relied extensively on information provided by prospectuses and disclosures in audited financial statements, a further study on other qualitative factors on what determines subscription levels may be necessary. Future studies can also focus on the specific company factors and behavioral factors investors consider that result to varying subscriptions levels as reported by various firms despite the market being the same and further determine whether these are the factors that influence the issuance of IPOs.