After market returns of initial public offering the case of viet nam

This thesis is to examine return behavior after IPOs in short-run and long-run on Vietnam stock market by using abnormal returns to measure the stocks return.. The thesis uses IPO price

VIET NAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

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AFTERMARKET RETURNS OF INITIAL PUBLIC OFFERING

THE CASE OF VIETNAM

By

NGUYEN LE NGOC KHOA

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

Ho Chi Minh City, July 2014

VIET NAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

-

AFTERMARKET RETURNS OF INITIAL PUBLIC OFFERING

THE CASE OF VIETNAM

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

NGUYEN LE NGOC KHOA

Academic supervisor

Dr TRUONG DANG THUY

Ho Chi Minh City, July 2014

ACKNOWLEDGEMENTS

This paper has could not be started and completed without the help of several individuals who supported me directly and indirectly First of all, I appreciate my supervisor Dr Nguyen Dang Thuy so much for his enthusiastic assistance He has not only given me intellectual guidance in academy but also encouraged me a lot through the analysis process It is so hard for me to complete this research without his profound advices I am also thankful to Dr Nguyen Trong Hoai and Dr Pham Khanh Nam for sharing his knowledge and practice experiences in researching which are very useful for this study I also thank my colleague, Ms Ngo Thi Kim Thanh for sharing her suggestion on the ideas to this thesis as well as econometric techniques

Abstract

Initial public offerings (or IPO) are usually hot topic in financial world This thesis

is to examine return behavior after IPOs in short-run and long-run on Vietnam stock market by using abnormal returns to measure the stocks return Market Efficiency hypothesis is applied to test the long-run performance Furthermore, given a regression model, the thesis also aims to determine which factors most impact on the stock’s performance aftermarket The thesis uses IPO price and trading price data from listed companies on Ho Chi Minh City Stock Exchange (HSX) and Hanoi Stock Exchange (HNX) in the period 2001 – 2013 The results showed that most of these companies are undervalued average of 63.5% in the first trading day after IPO events Then, stock returns are negative due to investors’ taking profit In the long-term, average rate of return of stocks are higher than the Vietnam’s benchmarks (VN – Index and HNX Index) within one year, two years and three years after the IPO In addition, the study shows that in short-term, the abnormal return of IPO events in the first trading day affected by firm size, listing exchange and industry But in the long-term, one year, two years, and three years after the IPO, there are no variables have statistical significance It implies that the accumulated abnormal returns were not affected by the model’ factors

Keywords: Stock market, underpricing

CHAPTER I: INTRODUCTION 5

1.1 Problem statement 5

1.2 Research objectives 6

1.3 Scope of study 7

CHAPTER II: LITERATURE REVIEW 8

2.1 Theoretical studies 8

2.2 Empirical studies 8

2.3 Conceptual framework 13

CHAPTER III: RESAERCH METHODOLOGY AND DATA 14

3.1 Research methodology 14

3.2 Research data 15

3.3 Variables description 19

3.4 Testing methods 22

CHAPTER IV: RESEARCH RESULT 25

4.1 Variables descriptive statistics 25

4.2 Multicollinearity testing 26

4.3 Multivariate regression model 27

CHAPTER V: CONCLUSION AND POLICY RECOMMENDATION 32

5.1 Conclusion 32

5.2 Policy recommendation 33

REFERENCE 35

APPENDICES 38

Table of charts and figures

Figure 1: VN Index 16

Figure 2: HNX Index 16

Figure 3: No of IPO events during period 2001 - 2010 17

Table 1: IPO events by stock exchange 17

Table 2: IPO events by industry 18

Table 3: IPO events by underwriters 18

Table 4: Descriptive statistics all variables 25

Table 5: Correlation matrix 26

Table 6: Variance inflation factor test 27

Table 7: Mean cumulative abnormal returns 27

Table 8:Short-term regressions 28

Table 9: Underpricing regression model 28

Table 10: White test result 30

Table 11: Skewness/kurtosis tests for Normality 30

Table 12: Underpricing regression model after data trimming 30

Table 13: Regression models in long-term 31

Table 14: Simple t-test to dependent variables 38

Table 15: Descriptive statistics detail to all variables 40

Table 16: Underpricing regression model 46

Table 17: CAR4D regression model 46

Table 18: CAR5D regression model 47

Table 19: CAR6M regression model 47

Table 20: CAR6MN regression model 48

Table 21: CAR1Y regression model 48

Table 22: CAR2Y regression model 49

Table 23: CAR3Y regression model 49

CHAPTER I: INTRODUCTION

1.1 Problem statement

Initial public offering (IPO) plays an important role in development of issuers and investors Firstly, IPO helps to attract more investment capital for the issuers’ development in long-terms and improve its image in investor’s eyes (Ritter and Welch, 2002) Secondly, IPO of large and potential companies has positive effect in catching the investors’ attention and then increase the market’s liquidity In addition, success of IPO depends on participation of investors who always want to look for large profit from the stock market It means that investors should be known that they would buy a good bargain in the IPO events and then would receive the profits as selling stocks in the market Therefore, this obviously motivates so-called

“underpircing” in IPO to make it to be more interesting for investment (Rock, 1986) However, a drawback to profit-seekers from IPO events is Efficient Market Hypothesis (EMH) (Fama, 1970 and 1997) Under the hypothesis, investors seem hard to seek more profit aftermarket, especially in long-term The daily trading price will fully reflect available information and thus there will be no more abnormal return Nevertheless, EMH, itself, could not explain convincingly many extraordinary phenomena in the financial history For instance, the Black Monday

on October 19th in 1987 indicated a great decline of 30% within a day in the U.S stock market and the other international stock markets in the world They stabilized and recovered quickly not long after that and generate a huge profit or abnormal returns to investors

In Vietnam, the stock market has experienced ups and downs since its start in 2001 When Vietnam had been going to join WTO, along with outbreak of VN-Index, IPO

the IPO events to seek abnormal returns A large cash flow was poured into the IPO events due to lacking of investment opportunities at that time and they hoped to earn profits as selling Since end 2008, because of influence of economic recession, Vietnamese corporation’ IPOs have not usually succeeded Thanks to positive signs for the economy, Vietnam is urging to speed up equitization process However, such one of the youngest stock markets over the world as Vietnam, whether investors can earn profit from IPOs, at least in short-term, or not and how about in long-run? Many theories and studies have explained underpricing in various ways using different data from different countries and in different time periods in the world However, there are very few empirical studies on this issue in Vietnam Several studies have tried to explain underpricing but just in terms of descriptive statistics

My goal is to use the updated data available with a longer event study to examine the IPO underpricing in Vietnam If there are more evidences indicate existing profitable of investment in IPOs or investors can score a success for their investment decisions, it can be more interesting for investors That is the reason for this research “Aftermarket return of Initial Public Offering – The case of Vietnam”

1.2 Research objectives

Firstly, the research aims to investigate aftermarket stocks’ performance of initial public offerings in short-run and long-run Data from hundreds companies went public and listing on HSX and HNX after IPO events are used to demonstrate the existing of abnormal returns The hypothesis here is returns in short-run is different from zero Obviously, the returns are expected as large as possible In the long-run, under the EMH hypothesis, it is expected there is no existence of abnormal returns

Secondly, by using a regression model the thesis also is to determine which factors can impact to IPOs’ performance aftermarket There are many models are applied to different period

1.3 Scope of study

The research has studied on the IPO and listed events on Vietnam's stock market in the period 2001 – 2013 For the IPO events in a certain year, (ex 2001), the next three years (ex: 2002, 2003, and 2004) will be considered as the first, second and third year since the first listed year Data will end in 2010 as the years 2011, 2012, and 2013 are used for long-term analysis

CHAPTER II: LITERATURE REVIEW

2.1 Theoretical studies

Efficient Market Hypothesis (EMH) was developed by Eugene E Fama (1970), in which he gave three forms of the theory, including weak form, semi-strong form and strong form Two first forms have been accepted commonly than the last one The first form claims that the current price of securities fully reflects its past information and investors cannot win the market given the past information The second form claims that securities’ current price “fully reflect all obviously publicly available information” (Fama, 1998) By efficient, most proponents of the theory mean that investors cannot earn above-average returns on the stock aftermarket It means that difference between stock returns and market returns equals zero The theory then has been challenged by behavior finance economists However, in the latest research on this theory in 1998, Fama reiterated his most important conclusion related to abnormal return in long-run He reckons that “apparent anomalies can be due to methodology, most long-term return anomalies tend to disappear with reasonable changes in technique”

2.2 Empirical studies

Most research on the issue recognized the existence of underpricing as returns on the first listing day is usually positive (Miller and Really, 1987; Allen and Faulhaber, 1989; Rock, 1986; and Tinic, 1998) However, based on EMH, there are unending discussion between its challengers and proponents about stocks performance in aftermarket in long-term The challengers said that IPO stocks often underperformed the market returns at least in the period three-to-five years The proponents imply that there are no evidences for underperformance of IPO stocks in long-term based on the EMH

2.2.1 IPO stock returns versus the market returns in short-term

Researchers found that the IPO corporations are often undervalued with supports of underwriters There are many studies to explain the causes of the market outperformance in the short term Below are summaries of causes

a Underpricing makes higher returns versus market return in the short-term Kevin Rock (1986) developed a model for the underpricing of IPO which that this phenomenon is due to uncertainty about value of stock to be offered This is caused

by asymmetric information Therefore, in order to attract the participation of common investors, the issuers’ stock often undervalued Besides, Ogden et al (2003) suggested that another cause of underpricing is to reduce risks of litigation to underwriters Some other ideas including Allen and Faulhaber (1989), Grinblatt and Hwang (1989) and Welch (1989) suggested that many managers volunteer in low pricing to themselves companies Sometimes, they associate analyst to create positive information as trading on the secondary market

In Vietnam, Ayi Gavriel Ayayi (2011) conducted the study, "Underpricing and long-term performance of auctioned IPOs: the Case of Viet Nam" including a sample of 206 companies auctioned from Feb 2005 to Jun 2007 The main findings are: (1) the IPO events in Vietnam were dominated by large-cap enterprises (mostly state-owned enterprises) which accounted for 98.5% of the IPOs These enterprises tried to choose the most appropriate time for their IPO event On the other hands, there are differences in the discriminatory auction mechanism Vietnamese firms use

to determine their prices results in comparison with auction-to-listing returns 93.63% to 1,182.68%) Moreover, the average return in the first trading day was low at 0.58%

(-b Overoptimism of the market causes stock’s outperformance in the term

short-Purnanandam and Swaminathan (2004) in study “Are IPOs really underpriced?"

and price-to-EBITDA The results showed that the IPO events have been profitable

in the first five trading days However, median value indicated that IPO firms’ stock were overvalued of 14% - 50% as using multiple valuations, depending on which multiple used These results showed that investors were often optimistic in forecasting growth, but less attention to current profits in valuing the IPO firms Another study by Purnanandam, Swaminathan, and Steven X Zheng (2007) showed that in the short-term IPO firms desired a higher return than the market However,

in the long-term, the IPO firms’ stock had no higher return versus the market in five years after the IPOs

c Supply restrictions in the first trading day cause the stock’s outperformance Zheng (2007) showed supply limitation (measured by the percentage of number of floating shares over number of initial outstanding shares) brought about outperformance This limitation is due to restriction regulation on transfer of shares

of founders, insider shareholders, and major shareholders within 180 days (6 months) from the offering day Besides, according to the Ogden et al (2003), the median of shares restricted rate in six months from 1991 to 2000 was 65% At the same time, short-sell transactions in the first trading day were Therefore, because

of excessive number of bids led, investors have had to pay more for securities in the IPO An IPO event has excessive stock demand would lead to higher price level in short-term after listing (Ellis, 2005 and Zheng, 2007)

d High stock demand and trading volume are also push stocks price in the first trading day

According to Aggarwal (2003), 70% of number of stocks listed after IPO had trading volume in the first trading day higher than the average accounted Furthermore, Geczy et al (2002), Ellis (2006) suggested that investors have looked for profit from stocks price fluctuations would contribute the increase in trading volume Katrina Ellis (2006) in the study "Who trades IPOs? A close look at the

first days of trading" found the first trading volume on stock exchanges has been influenced by profit-seekers by trading and investors who transferred their stock right after IPO events For small-cap corporations, it should be noted that dealer usually accumulate shares from IPO events to be a market-makers as they would be listed Ellis found that there was 25% of trading volume in the first listing day traded by interdealer

2.2.2 IPO stock return versus the market return in long-term

Most studies of Loughran , Ritter and Rydqvist (1994), Ogden et al (2003) , Zheng (2007) have said that the IPO stocks have underperformed their benchmarks in long-term The main reasons include:

a The excessive optimism and overreaction of investors

Based on a few successful IPO events, many investors have expected a high return from the IPO However, many failures have admitted that profit in short-term could

be lost in long-term This phenomenon was explained by the gradual correction of the market after hot period

b Agency costs related to cash flow from the IPOs

Zheng (2007) said that agency costs would affect potential cash flow received from the IPO and would be transferred as overvaluation in short-term It has led to underperformance in long-term Fluctuation of the agency costs have depended on level of capital expenditure in new assets and bid-ask spread in the first trading day

c Uncertainty of value of the IPO firms

Houge , Loughran , Suchanek and Yan (2001) found a relationship between wide opening spread, late opening trade, and a high flipping ratio and long-run returns These one suggests that IPOs can generate an overvaluation in short-term, but underperformance in long-term

d Restriction removal on transfer of IPO shares would increase supply in term

long-After transfer restriction has been removed, outstanding shares would be added, according to Zheng (2007), Ogden et al (2003) The supplement shares supply would decompress the increase in stock price

Probability of underperformance and outperformance in long-run is the same

Many recent studies have disclaimed the idea of underperformance in long-run The researchers confirmed the market is perfect, therefore it is not able to predict stock price in the future There are two explanations for this idea (1) returns calculation method, (2) characteristics of IPO companies

Fama (1998) suggested that underperformance of IPO stocks could be eliminated as using suitable adjusted techniques to maintain independence between anomalousness and applied methods He also demonstrated the efficiency of market which has generated zero return to investors in long-run However, if there have been anomalous events, overoptimism could be occurred

Gompers and Lerner (2003) studied the growth of overperformance of IPO events

in NASDAQ from 1935 to 1972 Abnormal returns are calculated by difference between stock returns and benchmarks returns The outcome showed the abnormal return has depended on the measurement method used They found that the Buy and hold abnormal returns (BHAR) would generate underperformance Conversely, the Cumulative abnormal returns (CAR) could eliminate compounding effect of a single year’s poor performance Anomalous returns are calculated by subtracting the market return from the IPO company’s return CAR was computed by summing the abnormal returns over three years or five years The results in comparison with the benchmark indices showed BHAR had a stronger fluctuation than CAR

Brav and Gompers (1997) demonstrated that the IPO firms’ characteristics affect the return in future They concluded that many small and same size IPO firms underperformed In long-term, underperformance has also happened to the small firms

The studies above of IPO events are mostly conducted in developed countries For Vietnam, there is few related studies can be found, such as Ayi Gavriel Ayayi (2011), Ly, T.T.H and Kha Duong (2013) While Ayi Gavriel Ayayi just used descriptive analysis to generate his conclusion, the research of Ly, T.T.H and Kha Duong used a small sample of 69 IPO events So I conducted this thesis with a wider sample to test two issues (1) Is there underpricing in IPO events in such young market like Vietnam (2) Which factors affect anomalous returns in short run and long run as well? Based on previous studies, I determined CARs is better to measure the abnormal returns I also determined which explanatory variables should

be included in the regression model to detect the significant factors

2.3 Conceptual framework

CHAPTER III: RESAERCH METHODOLOGY AND DATA

3.1 Research methodology

The aim of the study is to detect stock underpricing as they are listed in the aftermarket in short-run and long-run as well Stock returns are expected to outperform the benchmarks Then, I also would like to determine which factors affect the abnormal returns

Abnormal return measurement Difference between rate of return of stocks

affected by the IPO event and the market rate of return in the short-term and term is considered as abnormal return This return is normally measured by cumulative abnormal return (CARs) method and buy and hold abnormal return (BHAR) method CAR method is selected based on the research of Fama (1998) and Gompers and Lerner (2003) In these researchers view, CAR is better than BHAR which can increase underperformance The CAR measurement is described

Sum of all ε * i, and take average to calculate abnormal return for the IPO

Multiple regression models The model is used to measure the impact of

dependent variables, including firm size, free-float ratio, trading volume in the first

day of listing, the 1-month market return before the IPO events, listing exchange and underwriter to independent variable, abnormal return

3.2 Research data

As mentioned, there are few researches related underpricing of IPO firms in Vietnam Therefore, this study was conducted to find evidences for the low valuation phenomenon of in short–term It is aim to find the explanatory factors for this one given a data sample included 579 companies from both Ho Chi Minh Stock Exchange (HSX) and Hanoi Stock Exchange (HNX) during the period 2001 – 2013 They are collected from State Securities Committee Although HSX operated since

2000, but there is not enough data in this year So started time is 2001 In addition, there are some IPO firms that cannot collect IPO data, so the first day listing prices are used Time frame used in this study is the period 2001 – 2010 For the IPO events in a certain year, (ex 2001), the next three years (ex: 2002, 2003, and 2004) will be considered as the first, second and third year since the first listed year Data will end in 2010, correspondingly the years 2011, 2012, and 2013 are used for long-term analysis

Figure 1: VN Index

Source: Hochiminh Stock Exchange

Figure 2: HNX Index

Source: Hanoi stock Exchange

The list of IPO companies was taken from Stockplus’s database The market index stocks price were obtained from HSX and HNX The offer prices or listing price were from the firms’ prospectus

From figure 3, it was a significant increase in the number of IPO events for the years 2006 and 2007 as the index climbed o record high In this period, Vietnam was going to be a member of World Trade Organization and the economy was booming due to capital inflow from foreign investors as well as local investors In addition, in order to attract more firms joining the stock market, many encouraged policies were effective, including corporate income tax remission, IPO processes then have been slower due to decline of the market after the financial crisis in late

2008 It is consistent with the idea that IPO firms and underwriters have tried to issue their shares in the booming market

Figure 3: No of IPO events during period 2001 - 2010

Source: Stockplus

Number of firms listed in HNX has been higher than in HSX It could be explained that listing standards in HNX is easier than that one, so many firms can approach without any difficulties However, average issuing value in HNX has been much lower than HSX It is because

Table 1: IPO events by stock exchange

Industry No of issuers Mean (VND mm) Median (VND

Min (VND mm)

0 10 20 30 40 50 60 70 80 90

0 200 400 600 800 1,000 1,200

07/31/01 07/31/02 07/31/03 07/31/04 07/31/05 07/31/06 07/31/07 07/31/08 07/31/09 07/31/10

No of IPO events VN-index

Table 2: IPO events by industry

Industry No of issuers Mean (VND mm) Median (VND

Min (VND mm)

Table 3: IPO events by underwriters

Industry No of issuers Mean (VND mm) Median (VND

Min (VND mm)

to the CARs in short-term and long term

R i = 0 + 1 SIZE i + 2 FREEFLOAT i + 3 VOLUME i + 4 MARKETPERF i +

5 EXCHANGE i + 6 UNDERWRITER i + 7 INDUSTRY i +  (1)

Where, variables in (1) as defined as below:

Ri = CARi

SIZEi: the IPO firm size

FREEFLOATi: the floating shares ratio

VOLUMEi: the trading volume in the first listing day

MARKETPERFi: the marker returns one month before listing of stocks

EXCHANGEi: the stock exchanges

UNDERWRITERi: the underwriter for the issuer

INDUSTRYi: the business industry of IPO firm

Cumulative abnormal returns (CARs): In order to detect anomalous returns of

Fama (1998) and Gompers and Lerner (2003) which proposed a market model to measure normal performance

Where: γ' is a vector of IPO i from position t1to t2

Sum of all ε * i, and take average to calculate abnormal return for the IPO

Abnormal returns in short-term: one day, two days, three days after the listing

are considered as short-term, where rate of returns in the first day are measured by difference between closed price and offer price defined by underwriters

Abnormal returns in long-term: They are determined as anomalous returns within

one year, two years and three years after This is to test the Efficient market theory

of Fama (1998) which reckon that rate of returns in long-term would be zero It means that there is no factors influence on the rate of returns

Natural logarithm of firm size: It is the companies’ capitalization value and

defined as the product of the initial outstanding shares and the offer price The larger the companies are expected to generate more outperformed versus the market (Gompers and Lerner, 2003) Natural logarithm is to adjust the influence of abnormal data

Free-floating shares ratio: It is the ratio of free-floating shares divided by the

number of offered shares in the IPO events The variable is expected to have two influences (1) the low free-floating shares ratio has positive effect to stock price due

to limitation of supply (2) However, if it is too low, liquidity can be impacted (Ogden et al 2003)

The trading volume in the first trading day over number of offered shares: It is

expected to have directly proportional to IPO returns The attractive IPO events have a high return and large trading volume in the first listing day and vice versa (Ellis 2005)

The market rate of return previous month before stock IPO events: According

to Ogden et al (2003), Ritter (2006) and Fama (1998) argued that IPO events timing

is very important to its successfulness In the research, the market CAR one month

is used to measure this variable Hypothesis assumes that the market returns and tock returns vary direct proportion

Exchange: According to Mohammad Tayseer Chenine (2007) showed that after

listing, the performance could be affected by exchanges where the IPO firms listed

In Vietnam, there are two stock exchanges, including Ho Chi Minh Stock Exchange

- HSX and Hanoi Stock Exchange - HNX, in which HSX has higher standard for listing companies Better exchanges that the firms are listed, higher returns are generated These ones are dummy variables, where HSX is set as 1 and others are set as 0

Underwriters: Fernando and Mohammad Tayseer Chenine Saro Belden (2007)

found that underwriting organizations affect rate of return It is expected that issuers are underwritten by large and reputation organization can generate a better profit This is also dummy variables where large underwriters are set as 1 and others are set as 0 Large organizations are determined as ones have do consultancy work to more than thirty IPO issuers

3.4 Testing methods

Underpricing and EMH, how do we know?

In order to answer it, average CARs in various periods are used to measure degree

of underpricing In short run, CARs is expected positive value, but in long run, it should be close to zero under efficient market hypothesis Its test statistic is shown

at once to define degree of significance of CARs in comparison them to the critical values

Correlation matrix to test multicollinearity

Where the X variables are correlated with each other but not perfect as below:

λ1X1 + λ2X2 + …+ λkXk = 0

Where λ1 = λ2 = = λk are constants and not simultaneously equal to zero

A rule of degree of correlation is that if it is higher than 0.8, then multicollinearity becomes a significant problem However, this should seem a necessary condition for existence of multicollonearity This statistical phenomenon may exist even degree of correlation rather low (less than 0.5)

White test for heteroscedasticity

This test is to examine residual (ui) in population regression function It is expected

to be homoscedasticity or have the same variance If there is existence of heteroscedasticity or changes in variance, they are not efficient anymore

The regression equation residuals ui:

Null hypothesis H0: α2 = α3 = α4 = α5 = α6

It means that there are no changes in variance If Chi-square value exceeds the critical Chi- square at selected significant level, we may conclude existence of changes in variance The best linear unbiased estimator (BLUE) method is used to correct the heteroskedasticity phenomenon

In summary, the study used data sources IPO firms in the period 2001-2013 to study the influences of the factors of company size, free-float ratio, market returns one month before IPO firms, exchanges, and underwriters to CARs from the IPO events

in short-term and long-term The multivariate regression model under OLS method

is used Then, the tests are occurred to examine 1) whether the residual variance of a variable in a regression model is constant (homoscedasticity) by the White test, 2) multicollinearity by the correlation matrix and variance inflation factor test, and 3) autocorrelation by Durbin – Watson test and then correct the autocorrelation by Prais-Winston regression

Jarque – Bera test to examine normality of residuals and censoring data

The Jarque – Bera (JB) test is to examine whether sample data follow normal distribution or not It is defined by the following formula

Where n is the number of observations; S is the sample skewness, and K is the sample kurtosis

In case the residuals are not normality I will conduct Winsorization technique to limit extreme values or untrustworthy in the data set and then the magnitude of the