AN EMPIRICAL ANALYSIS OF WHY FIRMS GO PUBLIC: THE NIGERIAN EXPERIENCE

AN EMPIRICAL ANALYSIS OF WHY FIRMS GO PUBLIC: THE NIGERIAN EXPERIENCE

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.

AN EMPIRICAL ANALYSIS OF WHY FIRMS GO PUBLIC: THE NIGERIAN EXPERIENCE