ABSTRACT
The objective of this study is to
examine the pricing of public offerings in the Nigerian capital market: A case
study of Zenith bank, Guaranty Trust bank, Oceanic Bank, IBTC and Chattered
Bank were used. Data for the research were collected through primary and
secondary sources namely the annual reports and account and offer prospectus of
the respective banks, Securities and Exchange Commission, Nigerian Stock
Exchange, Central Bank of Nigeria (CBN) banking supervision unit annual reports
on the banks, textbooks, journals and seminar papers.
The data were analyzed and
presented using tables, simple percentage and ratios. The hypotheses were
tested using the computed ex-right price of shares and comparing it with the
offer price. The findings of the study showed that public offers in the
Nigerian capital market were not over- priced, offer for subscription and right
issues are the most popular method offering securities in Nigerian capital
market, the pre- offer price of shares is higher than the ex-right price and
the offer price during the study period.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND
TO THE STUDY
In the capital markets hundred
investors make several deals a day. The screen-based trading makes these deals
known to all in the capital markets. Thus, a large number of buyers and sellers
interact in the capital markets. The demand and supply forces help in
determining the prices. Since all information is publicly available, and since
no single investor is large to influence the security prices, the capital
markets provide a measure of fair price of security especially if the markets
have efficient pricing mechanism.
Pricing of new issues is different
from the method earlier mentioned. Companies in the Nigerian capital markets
are allowed to freely price share issues, subject to Securities and Exchange
Commission guidelines and approval. In the case of the listed companies the
current market price provides a basis for pricing the new issue of securities.
Companies generally fix the issue price 10 to 15 per cent below the current
market price to account for the effect of the supply pressure; It is relatively
difficult to price an IPO. Companies use the services of merchant or investment
bankers, who act as issue managers, to determine the issue price and manage the
issue of securities.
A company is required to issue a
prospect when it issues a share to the public. The prospectus should disclose
full information, including the risk factors in the issue, to the investors to
be able to appraise the pricing and form a judgement. New companies should give
the justification for the pricing to the prospective investors. Generally, the
price of the issue is fixed well before the actual issue. The price is not
changed at any stage of the offer. The price is generally kept on the lower
side so that the issue is fully subscribed and there is no devolvement of
underwriters. However, book building is an alternative to the fixed-pricing
method. In the case of normal public issue, the price is fixed and known in
advance. At the close of subscription, the company knows the number of shares
applied for. In book building the issue price is not fixed. Book building is a
process of offering securities at various bid prices from investors. The demand
for the security is assessed and the price discovered based on bids made by
investors. Price discovery, therefore, depends on the demand for shares at
different prices.
An
Initial Public Offering (IPO) is a company’s offering of equity to the public
and it is a major source of raising capital for firms. There are at least three
distinct mechanisms available for firm for issuing new securities which include
initiation public offer, right issue, and private placement
In this study, we shall be
examining the pricing of public offering in the Nigerian capital market with
particular reference to the Nigerian banking sector.
1.2 THE STATEMENT OF PROBLEM
One obvious problem that has faced
the Nigeria Capital market is the case severe overpricing of IPO .This resulted
as a result the desperate need of some companies to raise fund at cost by
manipulating accounts record to get approval the Securities and Exchange
Commission. Sometimes over pricing of share could be attributed to the activities
of the stock- broker who engage in share price manipulation. Many companies
have come to the market with factious prices for their shares without strong
fundament in order to obtain funds from the public and soon thereafter the
prices of these companies would crash. This has led to many investors to lose
huge amount money as over pricing of IPO. This has made some investors who the
technicalities of the market to shy away from the market .Another factor that
equally contribute to over-pricing of shares is the inefficient market system.
Based on the above discussion a
research problem therefore arises: Is the Initial Public Offerings, public
offerings and right issues in the Nigerian capital markets appropriately
priced? What are the methods used in security issue in Nigerian capital market.
1.3 THE
OBJECTIVES OF STUDY
The followings are the main objectives of this study:
(i)
To
determine methods used in initial public offers or public offers in Nigeria.
(ii)
To confirm
the methods from the use of published information by the banks involved.
(iii)
To examine
ex-right price and compare with pre-offer price
(iv)
To make
necessary recommendation based on our findings.
The following questions are raised to elicit more information for the
study;
(i)
What are
the methods used in offering securities in Nigerian capital market?
(ii) Do companies follow the same
method in offering securities?
(iii)
Does the
price of the IPO affect the ex-right price?
(iv)
Is IPO’S
appropriately price?
1.5 STATEMENT OF HYPOTHESIS
Considering the statement of the
problem and the objective of the study, the following research hypotheses were
formulated to guide the study:
Ho 1: Public offers in the Nigerian capital is over-priced
Ho 2: Offer for subscription and Right issue is not the most popular
method of offer.
1.6 SCOPE
OF THE STUDY
This research work is based on
commercial banks in Nigeria. It examined the pricing of public offering in the
Nigerian capital market. The research depended on primary data collected from
six (6) banks in Nigeria that went for public offering between 2004-2007.They
are: Zenith Bank Plc ,Guaranty Trust Bank plc, IBTC plc, Oceanic bank and
Chattered Bank plc. The choices of the banks are based on the expert advice of
the supervisor of this work. This study is limited to examining the pricing of
public offering in the Nigerian capital market.
1.7 LIMITATIONS OF THE STUDY
This research work was carried out
alongside with other academic work in the school. This study encountered some
constraints as there were some initial difficulties in getting some the banks
previous years’ annual reports and some other relevant information and
materials. Time equally took its toll as there was a time limit for research to
be completed. Notwithstanding the above constraints, the research study was
successfully completed as scheduled and met all the required objectives and
standards......
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