UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIET NAM THE NETHERLANDS VIET NAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ------------------------------------------- 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 1 UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIET NAM THE NETHERLANDS 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 2 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. 1 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 2 Contents CHAPTER I: INTRODUCTION. Scope of study.
7 CHAPTER II: LITERATURE REVIEW. 13 CHAPTER III: RESAERCH METHODOLOGY AND DATA. 22 CHAPTER IV: RESEARCH RESULT. Variables descriptive statistics.
Multivariate regression model. 27 CHAPTER V: CONCLUSION AND POLICY RECOMMENDATION. 38 3 Table of charts and figures Figure 1: VN Index .16 Figure 2: HNX Index. 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. 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. 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 issuance also broke out in 2006–2007 period. Most of investors wanted to jump in 5 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”. 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.
6 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. 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. 7 CHAPTER II: LITERATURE REVIEW 2. 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”. 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. IPO stock returns versus the market returns in short-term 8 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.
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.
Moreover, the average return in the first trading day was low at 0. Overoptimism of the market causes stock’s outperformance in the short- term. Purnanandam and Swaminathan (2004) in study “Are IPOs really underpriced?" which used the basic valuation methods, such as price-to-sales, price-to-earnings, 9 and price-to-EBITDA. The results showed that the IPO events have been profitable in the first five trading days.