ABSTRACT
Going public is one of the most common forms of equity financing used by firms to raise funds in order to finance their current and future operations. As part of this, firms become listed on a Stock Exchange so their shares become publicly traded. Being a publicly listed company comes with several benefits and obligations. In as much as firms are prone to some cost and obligations after listing, the bottom line for any firm that goes public is to obtain the necessary capital and recognition to make them more profitable.
This study seeks to investigate whether there is a relationship between listing on a Stock Exchange like that of Ghana`s and profitability. It focuses mainly on the financial stocks listed on the Ghana Stock Exchange and examines pre and post listing performance of these financial firms. It uses panel data regression analysis to deduce the relationship between Going Public and profitability. It also looks at factors that affect profitability of firms after Going Public in the Ghanaian context.
The paper concludes that there is positive relationship between going public and profitability. However, this relationship is not statistically significant. This means firms do not necessarily become profitable after going public. Nevertheless, there was a statistically significant positive relationship between assets of firms and profit margins. Recommendations made were managing and increasing asset base of firms to make them profitable and improving standards and regulations in various industries to enhance performance of firms.
Keywords: Ghana, Stock Exchange, Profitability, Financial Stocks, Window Dressing Theory, Adverse Selection Cost, Profit Margin
Table of Contents
Chapter 1…………………………………………………………………………………….. 1
Introduction…………………………………………………………………………………. 1
- Background to the study…………………………………………………….. 1
CHAPTER 2…………………………………………………………………………………. 11
LITERATURE REVIEW……………………………………………………………………. 11
2.2.3 Administrative Fees and Expenses…………………………………….. 12
- Benefits of Going Public…………………………………………………….. 12
CHAPTER 3…………………………………………………………………………………. 19
METHODOLOGY…………………………………………………………………………… 19
CHAPTER 4…………………………………………………………………………………. 28
DATA ANALYSIS AND DICUSSION……………………………………………………. 28
- Introduction……………………………………………………………………… 28
………………………………………………………………………………………………………………………………… 35
- Possible factors that may contribute to differences in results from prior studies…………………………………………………………………………… 38
CONCLUSION AND RECOMMENDATIONS………………………………………….. 42
5.5 Further Studies………………………………………………………………… 45
Appendix 1: Interview Questions for financial managers and Industry professionals……………………………………………………………………………. 46
Appendix 2: Data acquired from financial statements used for running the regression model………………………………………………………………………. 47
References…………………………………………………………………………………. 49
List of Acronyms
IPO – Initial Public Offer
CAL–CAL Bank Limited
TBL–Trust Bank Limited (The Gambia) EBG–Ecobank Ghana Limited ETI–Ecobank Transnational Incorporation GCB–Ghana Commercial Bank HFC–Home Finance Company Limited EGL–Enterprise Group Limited SCB–Standard Chartered Bank
SIC–SIC Insurance Company
UTB–Unique Trust Bank Limited
SG-SSB– Societe Generale-Social Security Bank
ROA–Return on Assets ROE–Return on Equity CFOS–Chief Financial Officers
LIST OF TABLES AND FIGURES
TABLE1: Theories that affects firms decisions to go public……………………….. 7
TABLE 2: Profit Margins for Pre and Posting listing Periods…………………….. 29
TABLE 3: Comparing Profit margins between Pre (-) and Post (+) listing 29
FIGURE 1: Graphical representation of the trend in profit margin between Pre and Post Listing Profit Margins (Mean)………………………………………………….. 30
FIGURE 2: Graphical representation of trends in profit margins between pre and post listing profitability (Median)…………………………………………………… 31
TABLE 4: Comparison of Profitability between Y-1 and Y+1……………………. 32
TABLE 5: Comparison of Profitability between Y-1 and Y+2……………………. 32
TABLE 6: Summary of dataset used in the study……………………………………… 34
TABLE 7: Results of Hausman test…………………………………………………………….. 35
TABLE 8: Results of running a Random Effects Model……………………………… 37
Chapter 1
Introduction
Background to the study
Initial Public Offers (IPOs) are the first shares given to the general public by a formerly private-owned company that decides to go public. Going public is a monumental decision for any company since it forever changes how it goes about doing its business as well as its ownership structure. Changes in ownership structure due to going public comes with corresponding issues such as the agency theory that may affect performance of a firm. Agency theory is the conflict of interest between managers and share-holders that arises as a result of a firm going public (Brealey et al, 2008). Researchers have gone back and forth with the issue of changes in ownership structure and performance. Mikkelson et al. (1997) found out that there was no relationship between changes in ownership structure and performance of firms among American IPOs whilst Kutsuna et al. (2002) established a link between both. Firms have diverse reasons for going public, a survey conducted by Brau and Fawcett among 366 Chief Financial Officers in the US revealed the following major reasons: to create public shares for use in future acquisitions, to enhance the reputation of firm, to broaden ownership base, to minimize cost of capital etc. (Brau and Fawcett, 2006).
