Key factors affecting initial public offering return an examination of compannies going public in vietnam

UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business --- Phan Thi Thuy Mai KEY FACTORS AFFECTING INITIAL PUBLIC OFFERING RETURN.. UNIVERSITY OF ECONOMICS HO CHI

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

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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

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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

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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

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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 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

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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

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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

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LIST OF FIGURES

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

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

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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

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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

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

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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)

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

14 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 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)

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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/-NĐ-

CP, 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 end-date 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 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

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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

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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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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

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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

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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

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

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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 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,

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underwriters must determine a public offering price that will be alluring to investors When underwriters determine the public offering price, they look at factors such as the strength of the company's financial statements, how profitable it is, public trends, growth rates and even investor confidence

Recently, there have been a number of new studies on IPOs suggesting things might not be so bleak First-day returns have become very large and there is some evidence that these returns are both predictable and exploitable Long-run returns have also improved and a number of investment strategies considering subgroups of IPOs have been found to yield very positive performance

Lowry and Schwert (2006) found that average first-day returns are predictable based on past average first-day returns and the number of IPOs in the pipeline (IPO returns are more positive when past returns and the size of the pipeline are large) This predictable return may be difficult to realize, however, since hot IPOs are generally oversubscribed While IPO subscriptions are not directly observable by investors, they can be inferred based on pricing decisions made in the IPO process When attempting to go public in the United States, an issuer must indicate a range of prices in their initial regulatory filing documents at which they believe they will be able to sell their shares If demand is strong, the issuer can increase the price above this range and if demand is weak, the issuer can cut the price Price adjustments, therefore, are good indicators of IPO subscriptions Unfortunately, first-day returns tend to be close to zero in IPOs when the offering price is cut and, therefore, they are

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relatively easy to purchase

Loughran and Ritter (2002) find one exception If an issuer cuts its offering price and yet market returns are positive(above two per cent over the filing period), first-day returns are, on average, ten percent Taken together, the Lowry and Schwert (2006) and Loughran and Ritter (2002) studies suggest a profitable and exploitable short-term IPO investing strategy – buy shares in IPOs that cut their offer price at a time when recent IPO first-day returns have been high, the IPO pipeline is deep, and the overall stock market has been realizing positive performance

Several new studies have also found that long-run IPO performance is predictably good for some issuers Krigman, Shaw and Womack (1999) find that one-year post-IPO returns are significantly higher for firms with high first-day returns and low “flipping” (when the ratio of seller-initiated block trades to total first-day trading volume is less than 18 per cent, the median for all IPOs)

2.3 IPO pricing

A company planning an IPO typically appoints a lead manager, known as

a bookrunner, to help it arrive at an appropriate price at which the shares should be issued There are two primary ways in which the price of an IPO can be determined Either the company, with the help of its lead managers, fixes a price ("fixed price method"), or the price can be determined through analysis of confidential investor demand data compiled by the bookrunner ("book building")

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Historically, some IPOs both globally and in the United States have been underpriced The effect of "initial underpricing" of an IPO is to generate additional interest in the stock when it first becomes publicly traded Flipping, or quickly selling shares for a profit, can lead to significant gains for investors who have been allocated shares of the IPO at the offering price However, underpricing an IPO results in lost potential capital for the issuer One extreme example is theglobe.com IPO which helped fuel the IPO "mania" of the late 90's internet era Underwritten by Bear Stearns on November 13, 1998, the IPO was priced at $9 per share The share price quickly increased 1000% after the opening of trading,

to a high of $97 Selling pressure from institutional flipping eventually drove the stock back down, and it closed the day at $63 Although the company did raise about $30 million from the offering it is estimated that with the level of demand for the offering and the volume of trading that took place the company might have left upwards of $200 million on the table

The danger of overpricing is also an important consideration If a stock is offered to the public at a higher price than the market will pay, the underwriters may have trouble meeting their commitments to sell shares Even if they sell all

of the issued shares, the stock may fall in value on the first day of trading If so, the stock may lose its marketability and hence even more of its value This could result in losses for investors, many of whom being the most favored clients of the underwriters Perhaps the best known example of this is the Facebook IPO in 2012

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Underwriters, therefore, take many factors into consideration when pricing

an IPO, and attempt to reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise an adequate amount of capital for the company The process of determining an optimal price usually involves the underwriters ("syndicate") arranging share purchase commitments from leading institutional investors

Geoffrey, and Swift (2009) believe that the underpricing of IPOs is less a deliberate act on the part of issuers and/or underwriters, than the result of an over-reaction on the part of investors (Friesen & Swift, 2009) One potential method for determining underpricing is through the use of IPO Underpricing Algorithms

In Vietnam, IPO pricing is determined through an auction, under which an initial price will be announced and investors are required to bid for higher prices

In most cases, the released price is an approximate level of the lowest and highest

A step of great importance that makes a success of IPO is to choose right time to

go public Many IPOs receive significant numbers of registration, it means that investors seek to purchase a higher amount of shares than the available shares But sometimes, the demand is lower than the supply due to concerns for the company’s prospects Thus the time to go public is of importance Pricing may be too low that investors fail to win the auction or pricing may be too high that investors suffer from losses

IPO pricing is very important because it affects share prices after IPO

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Possibly after IPO, shares of the business will be listed and traded on the formal market Then the listed price will be determined as average auction price If such price is high, it shows investors’ high expectation for the business, if such price is low, it shows low pricing for the company’s value

2.4 Related research and hypothesis development

2.4.1 Underwriter prestige

Most IPOs are made through firms that act as ‘‘firm commitment’’ underwriters for the company’s stock, which means that the company does not sell shares to the public directly but rather sells the shares to the underwriters at a negotiated discount to the price at which the shares will be offered to the public The underwriters then resell the shares to dealers and to their institutional and retail customers To help ensure a diversified, successful distribution of stock, a selling group of underwriters is usually formed, typically consisting of twenty to thirty members The core of the selling group is the underwriting syndicate, a group of firms that, in a firm commitment underwriting, is assembled in order to spread the financial risk of purchasing the shares and reselling them to the public

Historically, the reputation of the research analyst in the prospective manager’s investment banking firm has been a significant factor for companies selecting a managing underwriter because the coverage provided by a well respected research analyst can be critical to maintaining investor interest The company should evaluate the prospective manager’s selling and distribution capabilities Does the

=> H1: Underwriter is positively related to the IPO return

2.4.2 Firm size (Total asset of the year prior to IPO)

Total assets is the total value of all assets of the company at the time of reporting To control for the effect of firm size, Michael B.Heeley, Sharon F Matusik, and Neelam Jain (2007) included logged firm assets in the year prior to IPO It was important to account for firm size to insure that their patent stock measure reflected the innovation output of a firm and not firm size; larger firms in general have more patents In addition, an increase in firm size lowers underpricing because of reduced information asymmetry about the viability of the firm So the IPO return will higher

According to Vichakorn Chiraphadhanakul, Kennedy D Gunawardana

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(2005), Firm size of listed companies coming under financial industry Industrial sector in Bangkok stock market have positive relationship with IPO return

=> H2: Firm size is positively related to IPO return.

2.4.3 Leverage of the year prior to IPO

Financial leverage occurs when the company decided to finance most of its assets with debt Companies do this only when the demand for investment capital

of the enterprise is high but not enough equity to finance Corporate loan becomes payable debt, interest is calculated based on this principal

The impacts affecting the value of the company will be smaller if the securities issued is less risky This implies that there is a hierarchy as follows: capital structure will be affected when a company sponsors a new project: The first impact is the impact within the company then the debts and finally the capital In this model, high leverage can bring positive information to investors about the value of the company Ross (1977), John (1987), Noe (1988), Heinkel and Zechner (1990), Harris and Raviv (1990), and Nachman and Noe (1994) proposed the kind of capital structure in the model by which the leverage effect can transmit information to the market When a company used a relatively high debt

in its capital structure, it increasingly concerned about the use of high leverage Greater leverage before IPO will carry a reliable message on the company's reputation as the use of debt (the threat from the inability to pay debts led to bankruptcy) becomes relatively large burden for the business owners, limiting the ability to control the company's cash flow is relatively large and it increases

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the risk to the company's shares The company has a low value will restrict the use

of more debt because they do not want to fall into the state can not afford to pay and eventually led to bankruptcy

=> H3: Leverage is negatively related to the IPO return

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

I included a measure of firm age, measured as years since founding to the year prior to IPO In general, more public information is available about the value of older firms, which can reduce information asymmetries This reduction in asymmetry suggests that there will be a negative relationship between firm age and underpricing (Michael B.Heeley, Sharon F Matusik, and Neelam Jain, 2007)

Firms going public, especially young growth firms, face a market that is subject to sharp swings in valuations The fact that the issuing firm is subject to the whims of the market makes the IPO process a high-stress period for entrepreneurs

=> H4: AGE is positively related to IPO return

2.4.5 State ownership (percentage of state ownership after IPO)

To take the possible impact of ownership concentration into account, Nancy Huyghebaert and Cynthia Van Hulle (2000) add a variable measuring the ownership percentage of block holders owning at least 5% of the shares Furthermore, to control for the fact that the absolute amount of adverse selection costs may increase with the size of the firm, they also included an interaction term between ownership concentration and firm size

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=> H5: State ownership is positively related to the IPO return

2.4.6 Volume of IPO (Number of shares offered when IPO)

Nuray Guner, Zeynep Onder, Seza Danisoglu Rhoades (2000) studied that the relationship between the volume of IPOs and the initial day IPO returns is negative

IPO underpricing is negatively related to offering size, proportion of tradable shares, according to Z Jun Lin, Zhimin Tian (2012)

=> H6: Volume of IPO is negatively related to IPO return.

2.5 Hypotheses and research model

The research model is constructed subsequent to the literature review Derived from the literature surveyed, the following theoretical model is designed to facilitate the research It depicts the relationship between IPO return and its explanatory variables Thus the model of the research is:

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Figure 2.1: The research model

From literature review above, there are many different research on key factors affecting IPO return The object of this study is to indentify the relationship between IPO return and 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 Hypotheses for this study are developed based on the literature review and the actual concepts in Vietnam financial market

So, the hypotheses are:

H1: Underwriter prestige is positively related to the IPO return

H2: Firm size is positively related to IPO return

Underwriter prestige

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H3: Leverage is negatively related to the IPO return

H4: AGE is positively related to IPO return

H5: State ownership is positively related to the IPO return

H6: Volume of IPOs is negatively related to IPO return