UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business
------------------------------

Phan Thi Thuy Mai

KEY FACTORS AFFECTING INITIAL
PUBLIC OFFERING RETURN. AN
EXAMINATION OF COMPANIES
GOING PUBLIC IN VIETNAM.
MASTER OF BUSINESS (Honours)

Ho Chi Minh City – Year 2013


UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business
------------------------------

Phan Thi Thuy Mai

KEY FACTORS AFFECTING INITIAL
PUBLIC OFFERING RETURN. AN
EXAMINATION OF COMPANIES
GOING PUBLIC IN VIETNAM.
ID: MBUS111021

MASTER OF BUSINESS (Honours)

SUPERVISOR: Dr. Pham Quoc Hung

Ho Chi Minh City – Year 2013


ABSTRACT
This research aims at identifying main factors affecting on IPO return
of companies going public in Vietnam. I took a simple random sample of 166 from
all the companies that have come up with an IPO since 2007 to the third quarter of
2013 in Vietnam’s Stock

exchange to identify the relationship between

Underwriter prestige, Total asset, Leverage, A g e ( Number of years from the year
founded to the year prior to IPO), Percentage of state ownership after IPO and
Number of shares offered when IPO (independent variables) with the IPO return
(dependent variable).
IPO return is one of the most attractive investments in every stock market.
By using the published data that can be acquired by general investors, I
investigate those data which have relations to the return of IPO. Finally, I develop
and test the prediction model.

Keywords: Initial public offerings, IPO Return, underwriter prestige,
total asset, leverage, state ownership.

1


ACKNOWLEDGEMENT
Firstly, I would like to send my sincere thanks to my supervisor, Dr. Pham
Quoc Hung for his enthusiastic support during the research. He has helped me
take the knowledge, know the way of research in order to complete this thesis.

Secondly, I would like to thank the faculty and staff of International
School of Business (ISB) – University of Economy Ho Chi Minh, especially Prof.
Nguyen Dinh Tho, who has explained clearly and simply during the Research
Design For Master Thesis; and Prof. Dinh Thai Hoang, who has instructed me
how to do research through the Data analysis by SPSS.
Thirdly, I am grateful to my friends and my classmates from ISB MBUS1
for sharing knowledge to me.
Finally, I thank very much to my family and specially to my husband for
their support, understanding and encouragement through my life, particularly in this
time.
Sincerely thanks all.

Phan Thi Thuy Mai
Dong Nai, September 2013

2


TABLE OF CONTENTS
ABSTRACT ................................................................................................................. 1
ACKNOWLEDGEMENT ........................................................................................... 2
TABLE OF CONTENTS ............................................................................................. 3
LIST OF TABLES ....................................................................................................... 6
LIST OF FIGURES ..................................................................................................... 7
CHAPTER 1. INTRODUCTION ................................................................................ 8
1.1.

Background .................................................................................................... 8

1.2.


Research problems ......................................................................................... 9

1.3.

Research objectives ...................................................................................... 12

1.4.

Research scope .............................................................................................. 12

1.5.

Outline of study ............................................................................................ 13

CHAPTER II. LITERATURE REVIEW .................................................................15
2.1.

The concept of IPO ...................................................................................... 15

2.1.1.

Definition of IPO ................................................................................... 15

2.1.2.

Requirements of IPO............................................................................. 16

2.1.3.


IPO Auction ........................................................................................... 17

2.1.4.

IPO procedures: .................................................................................... 19

2.1.5.

Advantages and disadvantages in IPO ................................................. 21

2.2.

The concept of IPO Return......................................................................... 23

2.3.

IPO pricing.................................................................................................. 25

2.4.

Related research and hypothesis development .......................................... 28

2.4.1.

Underwriter prestige ............................................................................. 28

2.4.2.

Firm size (Total asset of the year prior to IPO) ................................... 29
3



2.4.3.

Leverage of the year prior to IPO ......................................................... 30

2.4.4.

AGE (number of years from founding to the year prior to IPO)......... 31

2.4.5.

State ownership (percentage of state ownership after IPO) ................. 31

2.4.6.

Volume of IPO (Number of shares offered when IPO)......................... 32

2.5.

Hypotheses and research model ................................................................ 32

CHAPTER III. RESEARCH METHOD .................................................................. 35
3.1.

Research design............................................................................................ 35

3.2.

Collecting data ............................................................................................. 35


3.3.

Research process .......................................................................................... 36

3.4.

Measurement scales ..................................................................................... 37

3.5.

Analysis ........................................................................................................ 39

CHAPTER 4. RESULTS AND DISCUSSION .........................................................42
4.1. Sample characteristics ..................................................................................42
4.2. Data description and correlation analysis................................................... 43
4.2.1. Data description ...................................................................................... 43
4.2.2. Correlation analysis ................................................................................ 45
4.3. Empirical analysis ........................................................................................ 46
4.3.1. Multiple regression analysis ................................................................... 46
4.4. Chapter summary ......................................................................................... 50
CHAPTER 5. CONCLUSION..................................................................................52
5.1. Implication ..................................................................................................... 52
5.2. Limitation ....................................................................................................... 53
5.3. Recommendations .......................................................................................... 54
References..................................................................................................................57

4



Appendix 1: Data of companies going public in Vietnam …………..………....61
Appendix 2: Outliners...............................................................................................65
Appendix 3: Normality and Heteroskedasticity ......................................................66
.
Appendix 4: MLR between IPO return and independent variables.......................68

5


LIST OF TABLES

Table 3.1: Variable descriptions………………………..............................................39

Table 4.1: EXCHANGE …………………………......................................................42

Table 4.2: Descriptive Statistics…………………………..………………………….44

Table 4.3: Pearson Correlation Matrix………………………………..…....……….46

Table 4.4: Coefficients………….…………………………………...…….………….48

Table 4.5: Model Summary…….……………………………………...…………….48

Table 4.6: ANOVA…………………………………………………...…..…….……..49

6


LIST OF FIGURES


Figure 2.1: The Research model ……………………………......................................33
Figure 4.1: Number of IPOs from 2007 to the third quarter 2013 ….………..….43

7


CHAPTER 1. INTRODUCTION
1.1. Background
Vietnam Stock Exchange has been in operation for 12 years and has
gradually established itself in the market economy, contributing to the success of
the market with

participation of the members of the State, the business

organizations, the securities of listed companies and investors.
Along with development of the market economy in Vietnam, the trend
of economic globalization,

waves of new business flowing into our country,

needs to exist and thrive in a competitive environment are forcing enterprises,
especially state enterprises, to provide transparency of management mechanisms .
Thereby, we can also see the role of stock market in general and in particular to
the development of national economy. The more reputation a company gains
in business, the more attention from the investors it gets on the first issue of
larger stocks. The initial public offering (IPO) is a very important step, it marks a
new period of development of the company. Although IPO has been made for
about twelve years in Vietnam, it is still pretty weak compared with the world.
There are many questions such as how IPO should be understood, how to proceed
with IPO, the benefits of an IPO and what key factors affecting IPO return in order

to have an successful IPO. From these things, I do research with the topic: “Key
factors affecting Initial public offering (IPO) return. An examination

of

Companies going public in Vietnam.” The study identified the following
8


specific objectives: identifying of key factors affecting IPO return in Vietnam; and
measuring the impact of these factors on IPO return in Vietnam.
1.2. Research problems
At present, determination of IPO price is primarily made by bidding
in Vietnam . However, knowledge of the majority of investors remains
limited. In addition, information provided by enterprises is not really enough so
the investors do not have a solid base to determine a reasonable bidding price. As
a result, such price might be too low that the investor fails to win the bid or might
be too high that causes losses to the investor.
Businesses carry out an IPO to mobilize certain initial capital, generally to
finance a new project. Before carrying out an IPO, a business must determine
starting price and

number of shares to be issued in order to ensure sufficient

capital. If price after IPO is higher than expected, the IPO-resulted capital will be
higher than the initial one. It does matter that how the business makes use of such
surplus capital efficiently.
If the business spends such capital to pay out dividend, it will create high
expectation of future growth of the business for investors, because the business is
only able to raise dividend when the business makes sure to maintain this ratio

in the future. But in fact it is different. The dividends do not come from investment
return of current projects, but because the business fails to seek a new project to
spend this capital.
9


If the business uses this capital to invest into another project, this project
must secure

rate of return that is either greater or equal to the required rate of

return of former projects done by the business, otherwise the use of such
surplus capital resulted from the IPO will be of no efficiency for the business
due to decrease in average rate of return of the business.
Nevertheless, for now in Vietnam, some businesses see that it is easier
to obtain equity financing than debt financing, so they launch IPO with
numerous quantity instead of borrowing funds, resulting to change in structure of
target capital. Besides, some businesses spend a significant amount of this capital
to clear former debt. With decrease in debt-to-equity ratio, interests from tax
shield acquired by the business will be reduced that goes against the purpose of
IPO.
In addition, if such surplus capital is resulted from IPO done by
large enterprises, corporations, it can be used to invest into subsidiary companies
that brings about misestimating the growth of subsidiary companies. Once
these subsidiary companies issue stocks, stock prices will be high due to market
expectation for these companies. This creates the so-called price bubble – market
prices fail to reflect real value of the company.
Determination of IPO price is very important because it affects stock
prices after IPO. Probably right after IPO, stocks of the business will be listed and
traded on the formal market. Then listed price will be determined as average

bidding price. If such price is high, it reflects investors’ high expectation for the
10


business. Therefore, the business must operate in such a way to meet the
expectation, it means efficient utilization of the acquired capital. The capital will
be of efficiency when the rate of return from initial capital -financed project is
higher than the average rate of return of former projects. If this rate of return is
lower than the average rate of return of former projects, it shows inefficient
utilization of IPO-resulted initial capital that will cause losses to shareholders and
stock prices will go down at next IPO. Possibly until one year after IPO, the
business’ stocks will only be listed and traded on formal market. Then if the
average bidding price is taken as listed price, it does not reflect real value of
the business at listing time. After one year in operation, the initial capital–financed
project will bring rate of return that is higher than the average rate of ratio from
former projects and enhance value of the company. At that time, real value of the
company will be greater than that at time of IPO. The listed price will be the low
pricing of the company’s value. This is opportunity for well-informed people to
seek profits when purchasing shares whose value is lower than their real value. If
the initial capital –financed project brings rate of return that is lower than the
average rate of return from former projects, it will lessen the company’s value
against the time of IPO. The listed price will be the high pricing of the company’s
value.
It is a fairly important decision to transfer a company to a public one. Once
it becomes a public company, it is required to consider whether it is able to
meet requirements on finance and sufficient infrastructure for an IPO? And which
11


factors affecting IPO return to drive company leaders to make right decision.

The research questions that are discussed in this thesis are as below:
-

What are the key factors affecting IPO return in Vietnam Stock

Exchange?
-

How to measure the impact of these factors on IPO return in Vietnam

Stock Exchange?
-

How can these factors and determinants be developed and evaluated

in order to have a successful IPO?
1.3. Research objectives
The study identified the following specific objectives:
-

To identify key factors affecting IPO return in Vietnam Stock Exchange;

-

To measure the impact of these factors on IPO return in Vietnam Stock

Exchange.
1.4. Research scope
Firstly, the study just focuses on the relationship between underwriter
prestige, total asset, leverage, A g e - number of years from the year founded to the

year prior to IPO, percentage of shares owned by the Vietnamese government after
IPO and number of shares offered upon IPO (independent variables) with the IPO
return (dependent variable).

12


Secondly, this research focuses on firms that have IPO in Vietnam
Stock Exchange from 2007 to the third quarter of 2013. The data of this research
is deeply based on market data from websites: www.hsx.vn and www.hnx.vn.
1.5. Outline of study
This research includes five chapters as below:
Chapter 1: “Introduction” generally introduces the subject with defined
problems, research questions, research objectives, and sources of information to
be collected for the research.
Chapter 2: “Literature Review” summarizes concepts and theories relating to
IPO Return, Underwriter prestige, Total asset, Leverage, Number of years
from the year founded to the year prior to IPO, Percentage of state ownership
after IPO, Number of shares offered when IPO, and the relationship among
them. From such reviews, basic theories for studying will be synthesized to
develop an initial research model and hypotheses used for the research.
Chapter 3: “Research Method”. Research methodology concerned in chapter
one, literature review and empirical model presented in chapter two, this
chapter

particularly

presents

the


research

design,

research

process,

measurement scales, sampling & data collection and data analysis.
Chapter 4: “Data analysis & result”. This chapter show result of data
analysis process, the proposed hypotheses and the result of hypothesis.
Chapter 5: “Conclusion” presents main conclusions and implications based on
13


the results of the previous chapters, as well as the limitations of this study.

14


CHAPTER II. LITERATURE REVIEW
2.1. The concept of IPO

2.1.1. Definition of IPO
IPO (standing for Public Offering in English) means release of shares to
the public for the first time. According to the common financial practice in
business, the release means a business’ initial mobilization of capital from the
public by issuing common shares, which certify proper ownership and the
corresponding voting rights for shareholders in annual general meeting or

extraordinary meeting. We can understand that the company sells part of their
ownership to share-purchaser who is called shareholder. A part of the IPO may be
the transfer of shares owned by existing shareholders.
Thus, the IPO happens only once for each firm, and after the IPO,
subsequent release is called issuance of shares on the secondary market. IPO is very
important for a business because this is the first challenge for every business and the
most important for a wide range of business operations.
The cause of this challenge is that the business must fulfill various
strict requirements on issuance and

regulations on information report before

they are permitted to raise capital broadly. The IPO is completely different
from selling a number of shares from an existing shareholder, but it is called
Stock Offering (Offer for Sale).
15


2.1.2. Requirements of IPO
In Vietnam, pursuant to Decree no. 48/1998/-NĐ-CP on securities and stock
market and Decree no. 01/1998/TT-UBCK guiding Decree no. 48/1998/-NĐCP, organizations carrying IPO shall meet the following requirements:
- Minimum charter capital of VND 10 billion;
- Business operations experience two successive years of profitability
- Members of the board of directors and director (general director) are
experienced in business administration
- Have a feasible plan on utilization of funds called from the release of shares
- A minimum of 100 shareholders who hold at least 20% of share capital of
the issuing organization; for organization whose share capital of more than VND
100 billion, such percentage shall be 15% of share capital of the issuing organization
- Minimum number of shareholders shall be 100 persons who hold at least

20% of share capital of the issuing organization
- Founding shareholder shall hold at least 20% of share capital of the issuing
organization and keep holding such quantity within 3 years at least since the enddate of the issuance session.
- In case nominal value of issued shares exceeds VND 10 billion, it requires
an underwriter.

16


2.1.3. IPO Auction
* Step 1 –Preparation of auction
- Board of equitization/Steering committee of equitization specifies starting
price of stock for auction.
- Publicize information on business preparing the auction at least 20 days prior
to the auction date.
- Coordinate with auction organization to deliver presentations on the
business for investors, if required.
* Step 2 - Auction
- The auction organization receives purchase application and deposits
of investors in accordance with the auction regulations.
- Investors participate into the auction under such forms: direct vote at
the business’ office (if the auction is organized at the business’ office); direct vote
at the intermediary financial institution (if the auction is organized at the
intermediary financial institution); direct vote at the Stock Exchange and
nominated agencies; vote by post as stipulated by the auction organization.
* Step 3 – Auction and determination of auction results
- The auction organization carries out checking

the auction votes and


enters information into the auction software.
- Determination of auction results is made by selection of purchase prices in
descending order until obtainment of sufficient amount of stocks on sale. At
17


the lowest winning price, in case there are various investors who set the same
purchase price, but total of the remaining stocks is less than total of registered
stocks, then determination of total stocks for sale for each investor is made on the
basis as follows:
Number of stocks that an investor is allowable to purchase = number of
the remaining stocks x (number of stocks that each investor registers to
purchase/total of stocks that investors register to purchase)
- Prepare minutes related to the auction to send to the board of equitization,
steering board of equitization, the business and the auction organization.
- Make announcement of the auction results and collect payment of stocks.
* Step 4 – Handle cases violating the auction regulations
- Handling cases of violation is done in accordance with the auction regulations.
- The investor shall not receive application money if he fails to abide by the
auction regulations.
* Step 5: Handle unsalable amount of stocks if any
- If the amount of stocks declined by the investors is less than 30% of the total
of stocks for sale, the steering committee of equitization keeps selling such amount
to the investors based on negotiated prices that are not lower than the average
winning price of the auction session.
- If the amount of stocks declined by the investors is more than 30% of the
total of stocks for sale, the steering committee will consider and decide to keep
18



selling the unsalable stocks (2nd session). Starting price in the 2nd session shall
not be lower than the lowest winning price.
2.1.4. IPO procedures:
Normally, IPO is carried out under the following steps:
a. The business takes account of IPO and agrees on goals of raising capital; amount
of capital to be raised; kinds and quantity of securities to be expectedly
released; structure of the expectedly released capital for allocated objects: the
management board, strategic partner, employees, persons outside the business,
foreigners etc.
b. The management board makes a decision to establish a board in charge of
preparing application for

IPO. Principle functions of the board include

preparation of IPO application to submit to the state bodies on securities and
stock market; selection of an underwriter (if required), auditing firm, consulting
firm and coordination with these organizations to set issuance plan and draft
prospectus to provide investors.
c. The preparation board selects an underwriter (for a business of huge capital, it
is required to have an underwriting syndicate that operates on the basis of the
contract between issuing organizations). The underwriter with his own
reputation and large network will facilitate allocation of securities for the
issuing

organization. Therefore, once IPO is made, it is very important to

choose an underwriter and it determines the success or failure of the issuance.
19



d. The preparation board together with the underwriting syndicate, auditing firm
and consulting firm will value securities to be issued. Valuation of securities is
the most difficult and complicated for the IPO. If it is over-valuated, it will be
difficult for selling securities, if it is under-valuated, it will cause losses
to the issuing organization. Therefore, proper valuation of securities that is
accepted by both seller and buyers is greatly important and it requires
coordination of the underwriter, auditing firm and consulting firm.
e. The issuing organization will submit paper works to the Securities Committee.
In most cases, the issuing organization will get answer on permit or refusal
within a certain period of time since submission of full and valid application.
While waiting
for feedback from the State Securities Committee, the issuing organization
can make use of the content in the preliminary prospectus for market exploration.
f. After being granted permit, the issuing organization shall make announcement
on mass media, at the same time release the formal prospectus to the public
and allocation of securities in a certain period of time since the date of
permit. Stipulation on allocation period differs from country to country. In
Vietnam, pursuant to Decree no. 48 on securities and stock market by the
Government, a period of 90 days is stipulated and the State Securities
Committee may give an extension if seeing that this is needed and reasonable.
g. Go ahead with registration, depository, transfer and payment of securities
20


after ending allocation of securities.
h. After completion of securities allocation, the issuing organization together with
the underwriter shall release a report on issuance outcomes to the Securities
Committee and register capital with the competent authorities.
i.


In case the issuing organization satisfies the listing requirements, they can
submit application for listing to the Securities Committee and Stock Exchange
where it is expected to be listed.

2.1.5. Advantages and disadvantages in IPO
a. Advantages
- Issuance of securities to the public will create a fine image and reputation
for a company, so it is easier and more cost-saving for the company to call the
capital by issuance of bonds, shares for subsequent times. In addition, clients and
suppliers will
become shareholders of the company. This will facilitate the purchase of materials
and consumption of products for the company.
- Issuance of securities to the public will raise the value of net assets, help
the company to call huge capital and easily access banking funds at preferred
interest rate and

with less complicated conditions on mortageable assets. For

example, shares of public companies are usually seen as mortageable assets to
borrow banking funds. Moreover, the issuance of securities to the public will
help the company to be an attractive candidate against foreign ones with respect to
21


a partner for joint venture.
- Issuance of securities to the public will help the company draw attention
and retain skillful staff because upon public offering, the company always
reserves a certain percentage of securities for their staff. As a result, staff
will become shareholders and be entitled to get return on equity instead of ordinary
income. This is motivation for them to work more efficiently and consider success

or failure of the company as their own matters.
- Upon issuance of securities to the public, the company has good
opportunities to build up a professional management system and a transparent
development strategy. It is also easy for the company to find a replacement,
securing continuousness in management. Besides, presence of trustees who do not
directly take part in managing the company will also help to enhance and balance
the management and leadership for the company.
- Issuance of securities to the public enhances quality and accuracy of
reports released by the company because such reports shall be generated in
accordance with common standards set by the administration body. It is thus
easier to assess and compare performance of the company.
b. Disadvangtages
- Issuance of securities to the public disperses ownership and may take away
rights of company control from the founding shareholders due to their
seizing activities

over

the

company.

Furthermore,

structure

of

company


22


ownership rights changes day after day because of daily transactions of shares.
- It is costly to issue securities to the public, accounting for 8-10% of the
called capital, including underwriting fees, legal consulting fees, printing fees,
auditing fees, listing fees etc. Additionally, the company must annually bear
incidental costs such as auditing fees for financial statements, preparation of
paper works submitted to the State Securities Committee and periodical release of
information.
- The company issuing securities to the public must observe a mechanism
of information release that is broad, strict and under tight supervision compared
with other companies. Moreover, the release of information on revenues,
profits, competitiveness, operation form, contracts of materials, as well as risks of
security leak might push the company to adverse competition.
-

The

management

personnel

of

the

company

shall


take

more

responsibilities before the public. In addition, transfer of their shares is usually
restricted due to legal regulations.
2.2. The concept of IPO Return
There are various measures of IPO return. In this research, I focus on the IPO
return measured by Closing Price on the first day of Listing /Issue Price, one of four
measurements of IPO return (Hiren Haria, Ajay Hingane, Mohit Bansal and
Nikhil Gore, 2011, p.3). Issue Price, the price at which new issues of stock are offered
to the public by an underwriter. Because the goal of an IPO is to raise money,
23