AN EMPIRICAL ANALYSIS OF WHY FIRMS GO PUBLIC: THE NIGERIAN EXPERIENCE
AN EMPIRICAL ANALYSIS OF WHY FIRMS GO PUBLIC: THE NIGERIAN EXPERIENCE
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Date
2000-11
Authors
JEGEDE, Rufus Biodun
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Abstract
Going public benefits a firm, the investing public and the entire economy. However, many
firms have not accessed the market for investment funds. They opt to remain private and the
share s are tightly held. Our work is aimed at finding out the motives that underlie a decision
to go public.
Our study examines extensively ex-ante and ex-post characteristics of some firms that
are listed on the Nigerian stock exchange. It examines for instance, the operating
performance of firms pre and post initial public offerings (IPOs). It also examines the
financial structures of IPO firms pre and post initial public offering. Variables examined
include gearing, financial leverage, return on assets (ROA), operating leverage, operating
margin (ROS), earnings per share, dividends per share, pay- out ratios pre and post IPO. We
also made a survey of fourteen firms that are yet to go public. We sought their opinion on
initial public offering under-pricing, issuance cost, tax on dividend income, corporate tax,
c r e d i t rating, disclosure, loss of control and their relationship with customers.
Management of most of the firms making primary offerings often state in their
prospectuses a need for funds to take advantage of growth in market prospects. Some other
firms cite a need to reduce debt-equity ratios in order to make investment less risky.
Therefore, the study examines the level and changes in operating performance and financial
structure pre and post IPO for selected quoted firms.
Our analysis shows a high and rising trend in operating performance pre IPO, an
indication of increasing need for funds to take advantage of market growth prospects. Post
initial public offerings performance also has a rising trend though the increase in efficiency
and profitability is slightly insignificant. Firms seeking for initial public offering are highly
geared and the trend is upward pre IPO. There is an observed downward trend in gearing
post IPO, though this is not statistically significant. A highly geared firm faces high financial
risk, low credit rating and scarcity of funds for new projects. Therefore, the need to change
the structure of corporate governance to reduce a firm's contractual obligations. The study
shows that majority of the chief executives of unquoted firms are of the opinion that initial
public offerings underpricing deters them from going public; that issuance costs are currently
on the high side. Dividend, corporate and withhold taxes are currently not a motivation to go
public. Disclosure does not pose serious threat to an average entrepreneur in Nigeria.
Majority of them agreed that they need external funds and that they do not believe that they
have high credit rating.
Some of our recommendations for increasing the number of listed firms include, (i)
Prober macro-economic management to reduce the level of inflation and the relative
attractiveness of debt market funding, (ii) Removal of barriers to capital inflow, (iii)
Reduction in issuance cost, (iv) Protection of firms from the effect of disclosing sensitive
information to rivals, (v) Establishment of Nigerian funds, (vi) Dividends tax holiday for
newly quoted firm, (vii) Integration of corporate and personal income tax.
Growth in IPO will boost capitalization liquidity, stock market integration and
securities market development in Nigeria.
Description
M.Sc. Thesis Submitted to the Postgraduate School, Ahmadu Bello University,
Zaria, in Partial Fulfillment of the Requirements for the Award of the Degree of
Master of Science (Economics)
Department of Economics
Faculty of Social Sciences
Ahmadu Bello University
Zaria, Nigeria
NOVEMBER, 2000
Keywords
EMPIRICAL ANALYSIS,, WHY FIRMS GO PUBLIC,, NIGERIAN EXPERIENCE