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


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

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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.

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


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

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

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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

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

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


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

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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

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.

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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


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.
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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
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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

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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