The underpricing and long-run underperformance of initial public

offerings: Evidence from Vietnam

Thi Hai Ly Tran
*
, Dat Chi Le
**
, and Thi Phuong Thao Hoang
***


Abstract
We examine a sample of 69 listed firms in Vietnamese stock market from January 2005 to July 2012 to
find evidence for Initial Public Offering (IPO) underpricing. The results show that the degree of
underpricing measured by the two alternative methods is 38% and 49%, respectively. We find no
evidence for long-run underperformance in time horizons of 12, 24 and 36 months. Furthermore, the
study documents that oversubscription rate and reserve price are negatively correlated to the level of
underpricing. Market factor has a weak impact. Other factors such as firm size, listing delay, age and
post-IPO state-ownership level have no relationship with underpricing. The results suggest a strategy
which invests in IPO stocks having low oversubscription rate and low reserve price can overperform the
market.

Key words: short-run underpricing; long-run underperformance, initial public offering, Vietnam.
JEL Classification: G32




*
School of Finance, University of Economics, Ho Chi Minh city, Vietnam
**
School of Finance, University of Economics, Ho Chi Minh city, Vietnam
***
School of Finance, University of Economics, Ho Chi Minh city, Vietnam; and is the corresponding
author. E-mail: phuongthao@ueh.edu.vn


1. Introduction
Starting from establishment in 2000
1
, Vietnamese stock market has been quickly developing with many
IPOs, the vast majority of which are partial privatization IPOs. Vietnamese IPO market has some special
characteristics. Firstly, the majority of IPOs come from large corporations which used to be fully state-
owned firms and the post-IPO state ownership level is high. Furthermore, the IPO mechanism used in
Vietnam is auction method while bookbuilding is popularly used in most of markets. Finally, there is
usually a very long time gap between going public and the actual listing of shares for trading.
There have been many studies involving IPO underpricing in developed markets. Due to data constrains,
however, there are few studies examining IPO underpricing in emerging markets. To the best of our
knowledge, Gavriel (2011) may be the only research for Vietnamese IPO market. This study contains
some drawbacks: (1) data limited to the period from February 2005 to June 2007, (2) presenting only
descriptive statistics, (3) not testing determinants driving IPO underpricing, and (4) the sample consisting
not only IPO auctions but also IPO-related auctions
2
.
We examine a sample of 69 Vietnamese IPOs to find evidence for short-run underpricing and long-run
underperformance. Moreover, we investigate determinants affecting the level of underpricing. With the
results, we suggest a potential investment strategy for IPO stocks in Vietnam.
We conduct the research to answer three following questions:
(1) Are IPOs underpriced in Vietnamese market?
(2) Is there evidence for long-run underperformance of IPOs?
(3) Which factors can determine the level of underpricing?
We find the average first-day returns measured by the two alternative methods are 38% and 49%,
respectively. We also find that oversubscription rate and reserve price are the main factors driving IPO
underpricing. This paper makes the following contributions to the IPO literature. First, by providing
empirical evidence, this study contributes to rationalizing the Vietnamese IPO underpricing. Second, by
examining the determinants of initial returns, this study contributes to investment strategies in
Vietnamese stock market.
This paper is organized as follows: Section 2 reviews the IPO literatures and presents our hypotheses of
factors explaining the level of IPO underpricing. Section 3 presents data and methodology. Section 4
examines short-run underpricing, long-run underperformance and determinants of initial returns with
multivariate analysis. Section 5 further discusses the results and suggests a potential strategy for IPO
stocks. Section 6 concludes this paper.
2. Literature review
Initial public offerings have interested financial economists for many decades. There are three puzzles
involving IPO, consisting of short-run underpricing, long-run underperformance and hot issue markets.
The first two problems will be our focus in this study. Because of data constrains, the final issue will be
left for future research.

1
There are two formal stock exchanges in Vietnam. They are Hochiminh Stock Exchange (HOSE, established in
July 2000) and Hanoi Stock Exchange (HNX, established in March 2005).
2
In Vietnam, there are many firms listing and trading in a stock exchange before IPO.
Short-run underpricing
IPO stocks, in general, exhibit some level of underpricing. Underpricing refers to the initial trading price
of IPOs above the offer price in the aftermarket. Empirical studies are abundant and conducted in many
markets. Ritter and Welch (2002), systematically studying over long period from 1980 to 2001, report
that the average level of underpricing in the U.S. varies from 10% to 20%. Dawson (1987) documents the
degree of underpricing in Hong Kong, Singapore and Malaysia is 13.8%, 39.4% and 166.6%,
respectively. Yong (1997) finds an average initial return of 75% over a sample of 224 Malaysian IPOs
from 1990 to 1994. Loughran et al. (1994) provide evidence for IPO underpricing in 25 countries,
including seven Asian countries, within an average first-day return of 17.6%, 32.5%, 78.1% and 45% for
Hong Kong, Japan, South Korea and Taiwan, respectively. Ritter (2003) documents IPO underpricing
phenomena in 38 markets, among these markets, China has the highest degree of underpricing with an
average initial return of 256.9%, next is Malaysia with 104.1% whereas this figure for US and UK is
18.4% and 17.4%, respectively. This research also concludes that, in general, the level of underpricing in
Asian countries is higher than those in US. Tian (2011) finds the Chinese IPO stocks are underpriced by
247% from 1992 to 2004. It can be confirmed that the cross-country underpricing variations at least in
part related to institutional differences among markets.
Long-run underperformance
One of the three IPO puzzles that has been paid attention from academics in recent years is performance
of IPOs in the long-term after the offering. Efficient market proponents state that once an IPO stock is
publicly traded, it is just like any other stock and therefore, the stock price in the secondary market should
appropriately reflect its intrinsic value. Many studies report different degrees of long-run IPO
underperformance according to different measures and time horizons. Ritter (1991) finds that U.S IPOs,
on average, have underperformed relative to a benchmark by 45% over three-year period since the
offering during 1974-1985. Subsequently, Ritter (2003) reports that IPOs have underperformed other
firms of the same size (market cap) by an average of 3.4%, 7.5% and 4.7% over 1, 2 and 3-year period
after issuing, respectively. Longhran and Ritter (1995) document an average three-year and five-year
buy-and-hold return of 8.4% and 15.7%, respectively, for IPOs compared to 35.3% and 66.4% of their
matching non-issuing firms. Chan, Wang and Wei (2004) investigate a sample of 319 Chinese A-Share
IPOs and find that A-share IPOs have underperformed by -3.7%, -4.3%, and -14.4% over 1, 2 and 3-year
horizon after first-trading day, respectively, relative to the same size firms, by -2.97%, -2.04%, and -
3.56% relative to the same BE/ME firms, and by -1.92%, -3.03%, and -19.77% relative to the same size
and BE/ME firms. Goergen, Khurshed and Mudambi (2007) report an average cumulative abnormal
return and abnormal buy-and-hold return of -20.76% and -21.98%, respectively, for U.K IPOs. Ahmad-
Zaluki (2012) provides evidence for adjusted poor performance of IPOs over a sample of 93 Malaysian
IPOs with an average cumulative abnormal return of -41.74% over 36-month horizon after going public.
Hypothesis development
Explanations for IPO underpricing can be classified into four groups: asymmetric information,
institutional reasons, control issues, and behavioral considerations. The most popular of these are the
asymmetric information based models. In this paper, we develop hypotheses of determinants of IPO
underpricing which are mainly based on asymmetric information argument.
Asymmetric information theory, one of the most thoroughly explored theories of underpricing, assumes
that the parties in IPO markets are not equally informed. Rock (1986) assumes that some investors know
more than other investors. This imposes a winners curse on uninformed investors. This requires that all
IPOs must be underpriced in expectation. Ritter and Welch (2002) show that all theories of underpricing
based on asymmetric information predict that underpricing is positively correlated to the degree of
asymmetric information. Beatty and Ritter (1986) argue there is a positive relationship between expected
underpricing and the level of uncertainty.
In this section we briefly describe arguments that have attempted to explain IPO underpricing. We then
propose some firm-level characteristics that can explain for underpricing, and present corresponding
hypotheses.
Oversubscription rate
Biais and Faugeron-Crouzet (2000) show that the level of underpricing will decrease with higher demand,
implying that the competition among investors induces more accurate evaluation of an IPO. As a result,
this leads to a decline in the degree of underpricing. The oversubscription rate is negatively related to the
initial returns in the sample of 69 French IPOs from 1983 to 1994. Likewise, Chi and Padgett (2005)
examine 668 Chinese IPOs and point out that the level of underpricing is mainly explained by inequality
between demand and supply. As demand pressure is higher, the level of underpricing is lower and vice
versa. In Vietnamese IPOs using auction method, the relationship between demand and supply could play
a direct role in determining the offer price and indirectly affect the level of underpricing. Consistent with
other studies, we use the number of shares subscribed divided by the number of shares offered as a proxy
for oversubscription rate.
Hypothesis 1: Oversubscription rate is negatively correlated to the level of underpricing.
State ownership
Some empirical studies investigating IPOs in China a market has many similar features like Vietnam
report that state ownership can accounts for the level of underpricing. This result can be derived from
asymmetric information argument. In this context, there are two parties participating in an IPO, one is
government that actually owns the IPO firm, fully before and partially after IPO, and the other is outside
investors who are considered to be uninformed about the quality of state-owned firms. To assure the
success of the IPO, the government has to underprice to attract investors. It means that the lower level of
post-IPO state ownership, the higher level of underpricing. Chi and Padgett (2005) supports the argument
by evidence of a negative relation between the level of post-IPO state ownership and underpricing.
However, Cheung et al. (2009) document the state-owned shareholdings is positively correlated to initial
returns during the period from 1992 to 2006, although this relation varies and is sometimes insignificant
in sub-periods. Chen et al. (2004) find higher degree of underpricing follows higher level of state
ownership.
High level of post-IPO state ownership is the striking feature in Vietnamese IPOs. To implement
privatization policy in which the government remains the dominating power, the government still holds
rather high shareholding level after IPO. While there are differences in pricing method and capital
withdrawing policy by the government between Vietnam and other markets (particularly China
3
), we
expect to find a negative correlation between the level of post-IPO state ownership and underpricing. We
use post-IPO equity proportion owned by the government or state-owned corporations in IPO firms as a
proxy for the level of post-IPO state ownership.
Hypothesis 2: The level of post-IPO state ownership is negatively related to the level of underpricing.
Reserve price
Fernando et al. (1999) suggests that initial offer price can have prediction ability for the level of
underpricing. The lower initial offer price, the higher level of underpricing is to attract potential investors.
Ibbotson et al. (1988) documents companies offering lower initial prices will provide the higher level of
underpricing. With auction mechanism used in Vietnamese IPOs, firms offer a reserve price for investors
to refer and all valid bids must place higher price. This makes Vietnamese IPOs different from other
markets, even China where IPOs formerly used fixed P/E ratio pricing method and switched to book-
building mechanism since 2005. In the fixed P/E ratio pricing method, Chinese government put a
significant intervention in offer price while Vietnamese government, in auction method, just sets a reserve
price (a possible minimum price) and let the market determine the final offer price. Therefore, reserve
price is a unique feature of Vietnamese IPOs and we use reserve price in this study as a potential
determinant of underpricing.
Hypothesis 3: Reserve price is negatively correlated to the level of underpricing.
Firm size and age
Theoretical arguments about underpricing based on asymmetric information provide prediction that
underpricing has a positive relation with uncertainty degree. It can be argued that a larger firm is better
known than a smaller firm, so smaller firms suffer more from asymmetric information. Size can therefore
serve as a proxy for information asymmetry. Adjasi et al. (2011) point out that firm size, measured by
total assets, is negatively related to underpricing. In addition, a firm with a longer history is also better
known than one with a shorter history. Tian (2011) documents that more established companies
experience lower level of underpricing on the sample of Chinese IPOs. Kirkulak and Davis (2005) find a
significantly negative relation between firm age and the degree of underpricing in the Japanese IPOs from
1998 to 2002 (when Japan switches to bookbuilding mechanism), while Kerins et al. (2007) report an
insignificant relation for the sample from 1995 to 1997 (when Japan uses Hybrid Auction Method). In the
study, we employ logarithm of total assets and logarithm of firm age as a proxy for firm size and age,
respectively.
Hypothesis 4: Firm size is negatively related to the level of underpricing.
Hypothesis 5: Firm age is negatively related to the level of underpricing.
Listing delay
The time lag from IPO date to listing date can be a proxy for uncertainty and liquidity risk for both issuers
and investors. The longer time lag, the higher risk they have to bear. Uddin (2008) examines the cases of

3
China formerly used fixed P/E ratio pricing method in which China Securities Regulatory Commission sets a target
P/E for IPOs. Since 2005, China changed to bookbuilding mechanism.
Singapore and Malaysia and find that delay period is positively related to underpricing. They interpret this
results that delay period serves a proxy for ex-ante uncertainty. Tian (2011) provides support with
evidence from Chinese firms. We use logarithm of number of days from IPO date to listing date as a
proxy for listing delay.
Hypothesis 6: Listing delay is positively related to the level of underpricing.
Firm-level risk
An empirical implication derived from a winners curse which is mentioned in Ritter (1984) and
afterwards in Beatty and Ritter (1986) is that the level of underpricing increases with post-IPO
uncertainty. Bradley et al. (2009) argue that firms with more risks can cause higher pricing uncertainty,
which leads to higher underpricing degree. In the study, we use standard deviation of aftermarket return
as a proxy for ex-ante uncertainty.
Hypothesis 7: Standard deviation of aftermarket return is positively correlated to underpricing.
Market condition
Market condition may indirectly affect the level of underpricing through IPO pricing (some studies argue
as investor sentiment before first trading day). Investor sentiment is defined as their view about overall
market short-run trend. Positive sentiment exhibits investor expectation of upward trend. As a result, it
leads to a rise in demand for IPO stocks in their first trading day, which causes an increase in price level
and first-day return. Therefore, it is predicted that market sentiment positively relates to first-day return.
However, there is no consistency in measuring market sentiment. Derrien and Womack (2003) use three
month before IPO date return of the market index as a proxy of market sentiment. Market sentiment also
measured by market return over a certain period before the first trading day, such as in Ljungqvist (1997);
Kunz and Aggarwal (1994). Samarakoon (2010) uses cumulative return of the market index over three-
month period before IPO date as a proxy for investor confidence about market trend. We use three-month
before IPO date return of Vn-Index, a capitalization-weighted index of all listed firms in Hochiminh
Stock Exchange, as a proxy for market condition.
Hypothesis 8: Three-month pre-IPO cumulative market return is positively related to underpricing.
3. Methodology
Measures for short-run underpricing
Underpricing is estimated as first-day return, the percentage difference between the price at which the
IPO shares were sold to investors and the price at which the shares subsequently trade in the aftermarket.
In well-developed capital markets, time lag between IPO date and listing date is short, underpricing
degree of IPO stock i is measured as abnormal first-day return (Adjasi et al. (2011), Nurwati and Lim
(2012)):

where

is raw first-day return of stock i calculated as following:
offer
offer first
i
P
P P
R

=

where
first
P is closing price of the stock i on the first trading day, and
offer
P is the average successful
auction price.

is Vn-Index return for the corresponding time period:

offer
offer first
mi
VN
VN VN
R

=

where
first
VN is the closing market index value on first trading day and
offer
VN is the closing market
index value on the offering day of the appropriate stock, while

is the first days comparable market

return.
Some studies argue that underpricing evidence may be sensitive to measurement methods. In less
developed capital markets, listing delay may last several months, or even years (e.g. China, Malaysia and
Vietnam). Aggarwal, Leal and Hernandez (1993) suggest the following method to compute the level of
underpricing:

)
`

+
+
= 1
1
1
100
1
m
i
i
R
R
MAAR

This method has also been employed in Sohail and Raheman (2009). We use both measures above to
calculate the level of underpricing.
Consistent with plenty of previous empirical evidence, we expect a positive adjusted initial return of
IPOs.
Hypothesis 1a: Average abnormal first-day return is positive.
Measures for long-run underperformance
Post-IPO intervals used in many empirical studies to measure long-run performance are different. The
most common intervals may be 12, 24, 36 and 60 months. In this study, we examine long-run
performance by the cumulative returns over the period of 12, 24 and 36 months after the first-trading day.
Cumulative adjusted-return is identified as in Ritter (1991), Gompers and Lerner (2003), and Nurwati and
Lim (2012) as described following:
We compute the benchmark-adjusted return for stock i in month t as:
mt it it
R R AR =

where
it
R is the raw return on firm i in month t.
mt
R is the benchmark return for corresponding month.
The cumulative benchmark-adjusted return from month t to month T2 is calculated as:

=
=
2
1
T
T t
it it
AR CAR

Another way to assess long-run performance of IPO stocks is using buy-and-hold abnormal return
(Derrien (2005) and Nurwati and Lim (2012)):
(

+
(

+ =

= =
2
1
2
1
2 1
min
) , (
1 ) 1 ( 1 ) 1 (
T
T t
mt
T
T t
it T T
R R BHAR

where
) , (
2 1
T T
BHAR is the benchmark-adjusted return of stock i over (T1, T2) period. T1 is the first-trading
day of the month following the first-trading day of stock i. The time gap between T2 and T1 is 12, 24 or
36 months.
Ritter (1991), Loughran and Ritter (1995), Chan, Wang and Wei (2004), and Goergen et al. (2007)
document evidence for long-run underperformance of IPO companies. We expect to find similar results
for Vietnamese IPO firms.
Hypothesis 1b: Average cross-sectional cumulative abnormal return of IPO companies is negative.
Determinants of underpricing
As early discussed, in Table 1, we summarize the main hypotheses that are relevant to the level of
underpricing as well as how to calculate variables.
Table 1. Testable hypotheses to explain underpricing
The variables below are used in the literature and in this paper as explanations for IPO underpricing or the
first-day return, MAAR or AR. More detailed definitions of the explanatory variables are provided in
section 2 of the paper.
Explanatory variable Variable name Measurement Impact on
underpricing
Oversubscription rate Demand The number of subscribed shares/the number
of offered shares

Listing delay LnDel Logarithm of the number of days from IPO
date to listing date
+
Firm age LnAge Logarithm of the firm age
Firm risk Std Standard deviation of 6-month-after-first-
trading-day return of IPO firm
+
Firm size LnFSize Logarithm of post-IPO Total assets
Post-IPO state ownership Stateown Ownership by the government or state-owned
corporations

Market condition MarReturn Cumulative Vn-Index return over 3 months
before the first-trading day
+
Reserve price LnResprice Logarithm of reserve price

Testing hypotheses
Statistical tests are used to examine whether there is evidence for short-run underpricing and long-run
underperformance. To investigate determinants driving the level of underpricing, we employ following
linear regression model:
MAAR = +
1
Demand +
1
LnDel +
1
LnAge +
1
Std +
1
LnFSize +
1
Stateown +

1
MarReturn +
1
LnResprice +e
t
(1)
AR = +
1
Demand +
1
LnDel +
1
LnAge +
1
Std +
1
LnFSize +
1
Stateown +

1
MarReturn +
1
LnResprice +e
t
(2)
We use OLS method to estimate coefficients. In the presence of heteroskedasticity, we calculate robust
standard errors as White (1980).
Although OLS method is the most popular method used in empirical studies of IPO underpricing, this
method contains some drawbacks. It requires normal distribution assumption. In small sample cases,
using bootstrap can produce more reliable estimators. Furthermore, bootstrap method does not require
normal distribution assumption. Therefore, we employ bootstrap method besides OLS method.
Data
IPO auction data is collected from State Security of Commission of Vietnam, Hochiminh Stock Exchange
(HOSE), and Hanoi Stock Exchange (HNX). Furthermore, we also collect data of 4 firms in Upcom
Exchange whose auction data is available
4
. Collection procedure consists of 4 steps. First, we collect a list
of all listed firms in HOSE and HNX. Until July 2012, the number of listed firms is 698. Secondly, we
collect a list of auctions available in HOSE and HNX. Up to July 2012, the number of auctions is 348.
Then, after reconciling the two lists, we find 108 firms listed among 348 firms (52 firms in HOSE and 54
firms in HNX). Plus 4 firms in Upcom Exchange, we have a total of 112 firms. However, some firms
have not available data, hence we eliminate 4 firms whose data is unavailable and have a sample of 108
firms. Nevertheless, when reconciling IPO date and listing date, we find 39 auctions conducted after
listing and trading in market. By nature, they are not IPO auctions. Therefore, we continue to exclude
these firms and reach the final sample of 69 firms.
4. Research results
This section illustrates results of statistical tests for short-run underpricing as well as long-run
underperformance. Then, regression analysis is used to identify determinants influencing underpricing.
Finally, we suggest an investment strategy for IPO companies.
Evidence for short-run underpricing
Figure 1 shows that the level of underpricing dramatically varies. MAAR ranges from -89% to 361%. AR
even exhibits a larger variation, from 231% to 753%. An average level of underpricing shown by MAAR
is 49.09% with a standard deviation of 103.5%. Again, higher standard deviation points out larger
underpricing variation of IPO firms in the sample. Adjusted first-day return distribution is skewed. With
AR measure, an average level of underpricing is 38.01% with a standard deviation of 134.5%. Table 2
shows t-test for underpricing. MAAR and AR are statistically significant at the 1 and 5 percent level with

4
Upcom Exchange is an over-the-counter market where unlisted securities are traded, established in 2008.
t-statistic of 3.93 and 2.34, respectively. Thus, we can reject the null Hypothesis 1a. With this result, we
have evidence of underpricing for Vietnamese IPOs. Reconciling to Gavriel (2011), he finds an average
degree of underpricing of 0.58% for Vietnamese IPOs. He argues that this level of underpricing is low.
For comparison, we calculate the degree of underpricing as same as his method. By this way, his measure
is unadjusted first-day return which equals difference between first-day closing price and average auction
price divided by average auction price multiplied by listing time lags. We obtain a lower figure of 0.21%.
Nevertheless, we argue that unadjusted first-day return cannot fully reflect the degree of underpricing.
Figure 1. Descriptive statistics for MAAR

Unlike many capital markets where bookbuilding method is the most popular mechanism, Vietnamese
IPOs use price discrimination auction method in which each investor pays at their bid price. Investors
who place the minimum successful bid price will pay at this price. Therefore, they can earn above-
average first-day return. By contrast, investors placing maximum bid price will get lower first-day return.
However, IPO regulations only require a deposit 10% of bid value, hence some investors can make price
manipulation by placing a small volume with very high bid price, but subsequently not finishing payment
for their bids. Thus, the maximum successful bid price may be unreal. For the reason, we report the first-
day return for minimum-bid-price investors rather than maximum-bid-price investors.
Table 2. Testing for underpricing
The table reports t-test results for mean of MAAR and AR
Underpricing measure Obs Mean Std. Dev t-statistic
MAAR 69 0.4908865
***
1.03514 3.93
AR 69 0.3801205
**
1.344833 2.34
***
,
**
,
*
indicate significance at the one, five and ten percent levels.
Table 3 depicts that minimum-bid-price investors earn an adjusted first-day return of 67% compared to
the average of 49.09% (MAAR) and 49.93% compared to the average of 38.01% (AR). The results are
statistically significant at the 1 percent level.
Table 3. Testing of underpricing for minimum-bid-price investors
The table presents t-test results for difference of means between average-bid-price MAAR (AR) and minimum-
bid-price-MAAR (AR).
Underpricing measure Obs Mean Std. Dev Difference-of-means t-statistic
MAAR
min
69 0.674563
***
1.187814 -3.15
AR
min
69 0.499382
***
1.414594 -3.47
***
,
**
,
*
indicate significance at the one, five and ten percent levels.
Evidence for long-run underperformance
We compute cumulative adjusted return for 12, 24, and 36 month intervals (in both CAR and BHAR
measures) to assess long-run performance. The longer interval, the fewer companies with available data
there are. In this context, we have 67, 55 and 45 IPOs for the 12, 24, and 36 month intervals, respectively.
Figure 2. 36-month-interval BHAR of IPOs

Figure 2 reveals 36-month-interval cumulative returns of IPOs. Table 4 shows statistical tests for long-run
underperformance. The average of CAR over different intervals has sign inconsistency and none of them
are statistically significant. While the average of 36-month and 24-month BHAR is -6% and -5.31%,
respectively, which is appropriate to our expectation, they are statistically insignificant. Thus, the null
Hypothesis 1b cannot be rejected. In general, we find no evidence of long-run underperformance for our
Vietnamese IPO sample.
Table 4. Statistical tests for long-run underperformance
The table presents t-test results for long-run underperformance. CAR12 (BHAR12), CAR24 (BHAR24), and
CAR36 (BHAR36) are cumulative abnormal return (buy-and-hold abnormal return) over the intervals of 12, 24
and 36 months after the first-trading day, respectively.
Variable Obs Mean Min Max Std. Dev t-statistic
CAR12
67 0.0365 -1.9218 1.5739 0.5883 0.5073
CAR24
55 -0.0069 -1.2820 1.2505 0.6984 -0.0738
CAR36
45 0.1349 -1.5212 1.7496 0.7028 1.2879
BHAR12
67 0.0500 -1.0806 1.9974 0.6309 0.6490
BHAR24
55 -0.0531 -1.3070 1.6410 0.5780 -0.6808
BHAR36
45 -0.0600 -1.4099 1.1319 0.4663 -0.8636
***
,
**
,
*
indicate significance at the one, five and ten percent levels.
Determinants of underpricing
Table 5 shows the sample descriptive statistics of factors which are examined in regression analysis.
Oversubscription rate exhibits an average of 4.28 times and a median of 2.8 times. While oversubscription
rate is rather high, it has a large variation with a standard deviation of 3.66. Listing time lag for
Vietnamese IPOs is very long with an average of 599 days, ranging from 42 days to 1434 days.
Vietnamese IPO firms have an age average of 17.8 years within the oldest firm of 50 years old. Note that
BHAR36
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-1
-0.5
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0.5
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1.5
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the longer history in Vietnamese state-owned firms can not reflect the lower level of uncertainty because
they have been operating in a less competitive environment. Standard deviation of 6-month-after-first-
trading-day return of the sample IPO companies is 3.72%. Mean size as proxied by pre-IPO total assets is
7,230 billion VND which largely varies from 34 to 167,127 billion VND. An average level of state
ownership is 48.55% with standard deviation of 27.82%. Mean reserve price is 57,013 VND. An average
of 3-month-before-trading cumulative market return is 3.78%, with a median of 1.87%.
Table 5. Descriptive statistics of variables
Descriptive statistics are presented for the level of underpricing (AR, MAAR) computed as in Ritter (1991), and
Aggarwal, Leal and Hernandez (1993), oversubscription rate (Demand) using demand of shares over offered shares,
listing delay (Del), firm age (Age), standard deviation of 6-month-after-the-first-trading-day return (Std), pre-IPO
firm size (FSize) using total assets, post-IPO state ownership (Stateown), 3-month-before-IPO-day market return
(MarReturn) and reserve price (Resprice).
Mean Median Min Max Std Dev Skewness Kurtosis
AR 0.3801 0.2030 -2.3115 7.5439 1.3448 2.3812 13.7214
MAAR 0.4909 0.2809 -0.8925 3.7132 1.0351 1.0988 4.1034
Demand 4.2874 2.8260 0.0400 15.2981 3.6697 1.1601 3.6796
Del 599.8 575 42 1434 356 0.3980 2.4470
Age 17.8406 14.0000 2.0000 50.0000 12.9293 0.9447 3.0538
Std 0.0372 0.0324 0.0198 0.0990 0.0155 2.4626 9.5929
FSize 7230.48 483.23 34.59 167127.83 28555.98 5.1833 29.0235
Stateown 0.4855 0.5168 0.0000 0.9989 0.2782 -0.5084 2.2112
MarReturn 0.0378 0.0187 -0.3952 0.5945 0.2291 0.3811 2.4185
Resprice 57014 15750 10000 1400000 174176 6.9231 53.0327

Table 6 provides correlations among these variables. A correlation between MAAR and AR is 0.76 which
shows that they are imperfect substitutes. Furthermore, it seems that there is little correlation between
dependent variables and explanatory variables.

Table 6. Correlation matrix of variables
The table presents correlations among variables and t-test results for mean of variables.
MAAR AR Demand LnDel LnAge LnFSize Std Stateown MarReturn Lnresprice
MAAR 1.00
AR 0.76
***
1.00
Demand -0.22
*
-0.16 1.00
LnDel -0.00 -0.08 0.20* 1.00
LnAge 0.05 -0.09 0.02 0.19 1.00
LnFSize -0.09 -0.02 -0.11 -0.16 0.22* 1.00
Std -0.00 -0.00 0.28** 0.29** -0.10 -0.33
***
1.00
Stateown 0.05 0.12 -0.15 0.12 0.08 0.44*** 0.00 1.00
MarReturn 0.00 0.14 0.02 -0.02 0.20* 0.27** -0.11 0.22
*
1.00
lnresprice -0.46
***
-0.43
***
-0.12 -0.32
***
-0.04 0.10 -0.17 -0.32
***
0.04 1.00
***
,
**
,
*
indicate significance at the one, five and ten percent levels.


Results of cross-sectional regression
Table 7 reports regression of MAAR with independent variables derived from IPO theories and empirical
studies. Regression with OLS, OLS with White robust procedure and bootstrap method show that there
are only two determinants which are significantly related to underpricing degree at 1 percent level,
namely oversubscription rate and reserve price.
Table 7. MAAR regression results
The table presents OLS, OLS with White-robust procedure, and bootstrap estimates. The regressions are specified
as in equation (1). The dependent variables is the level of underpricing (MAAR) and the explanatory variables are
oversubscription rate (Demand), listing delay (LnDeL), firm age (LnAge), standard deviation of 6-month-after-
the-first-trading-day return (Std), pre-IPO firm size (LnFsize) using total assets, post-IPO state ownership
(Stateown), 3-month-before-IPO-day market return (MarReturn) and reserve price (LnResprice). The second, third
and forth columns report t-statistic for OLS, OLS with White-robust procedure, and bootstrap estimates.
MAAR

Coefficient
OLS Robust Bootstrap
t-statistic t-statistic t-statistic
Demand -0.0866
***
-2.70 -2.88

-2.66

LnDel -0.1758 -1.18 -1.19 -1.13
LnAge 0.0906 0.65 0.63 0.59
Std 1.0979 0.14 0.19 0.14
LnFSize -0.0321 -0.38 -0.45 -0.41
Stateown -0.6163 -1.21 -1.22 -1.20
MarReturn 0.3224 0.64 0.64 0.60
Lnresprice -0.6040
***
-4.87 -4.28

-3.86

Constant 8.9147
***
3.31 2.99 2.69
Squared-R 0.342
***
,
**
,
*
indicate significance at the one, five and ten percent levels.

Table 8 shows the similar regression with AR measure. The results with the three methods are quite
consistent. The oversubscription rate and reserve price is significant at 1 percent level. Furthermore,
market condition is significant at 10 percent level.

Table 8. AR regression results
The table presents OLS, OLS with White-robust procedure, and bootstrap estimates. The regressions are specified
as in equation (2). The dependent variables is the level of underpricing (AR) and the explanatory variables are
oversubscription rate (Demand), listing delay (LnDeL), firm age (LnAge), standard deviation of 6-month-after-
the-first-trading-day return (Std), pre-IPO firm size (LnFsize) using total assets, post-IPO state ownership
(Stateown), 3-month-before-IPO-day market return (MarReturn) and reserve price (LnResprice). The second, third
and forth columns report t-statistic for OLS, OLS with White-robust procedure, and bootstrap estimates.
AR

Coefficient
OLS Robust Bootstrap
t-statistic t-statistic t-statistic
Demand -0.0828
**
-1.97 -2.63

-2.29

LnDel -0.2970 -1.51 -1.47 -1.36
LnAge -0.1854 -1.02 -0.76 -0.76
Std 1.9196 0.18 0.26 0.20
LnFSize 0.0014 0.01 0.02 0.01
Stateown -0.5551 -0.83 -1.02 -1.01
MarReturn 1.1317
*
1.98 1.69 1.67
Lnresprice -0.7546
***
-4.64 -3.10

-2.86

Constant 10.7434
*
3.04 2.15 1.92
Squared-R 0.328
***
,
**
,
*
indicate significance at the one, five and ten percent levels.

5. Discussions
In the small-sample case, interpretations from bootstrap regression are more reliable. Therefore, we focus
on bootstrap results.
Underpricing is negatively correlated to oversubscription rate. It is consistent with our expectation. When
demand is high, it can exceed supply as many times. In IPO auction mechanism, if investors perceive that
there are many investors interested in an IPO and the competition is high, they may place higher bid price
to win an IPO allocation. The result is consistent with Biais and Faugeron-Crouzet (2000) and Chi and
Padgett (2005). Therefore, we can reject the null Hypothesis 1.
We find an extremely significantly negative relationship between reserve price and the level of
underpricing when using both MAAR and AR. Moreover, the significant level is consistent in all the
regression methods. Like some prior studies, the price the issuer offers partly exhibits the level of
underpricing. Hence, reserve price can be an indicator for investors. Furthermore, according Vietnamese
SECs regulations, a bid is valid unless it is higher than the reserve price. Thus, reserve price is an
importance reference point for placing bids in Vietnamese IPOs. This finding permits the rejection of the
null Hypothesis 2.
Unlike many other papers finding consistent evidence of listing delay impact on underpricing, listing
delay of Vietnamese IPO companies is insignificant for both MAAR and AR with t-statistic of -1.13 and -
1.36, respectively. This result may be a Vietnamese market characteristic in which investors cannot
predict exact the time when an IPO firm would be listed. In fact, average listing time lag is rather high
(599 days). Therefore, the null Hypothesis 3 cannot be rejected.
Underpricing is insignificantly related to firm age with low t-statistic and sign inconsistence when
switching between the two measures MAAR and AR. Kerins et al. (2007) report similar result on the
sample of Japanese firms during 1995-1997 (when Japan uses Hybrid Auction-Method). In expectation, a
firm with a longer history is also better known than one with a shorter history, thus, the level of
underpricing may be lower. The argument, however, may be inappropriate to the case of Vietnam. In fact,
Vietnamese IPO firms have a long operation history with the average age of 17.8 years and the maximum
is 50 years. Despite of such long history, the majority of Vietnam IPO firms are state-owned firms,
operating in a less competitive environment for a long time, so that firm age cannot reflect actual firm
maturity. Moreover, it is not easy to collect information about Vietnamese state-owned firms in spite of
their long history. Thus, we cannot reject the null Hypothesis 4.
Underpricing has an insignificant association to 6-month-after-first-trading-day return volatility although
coefficient sign is as positive as our expectation. A possible explanation is that investors have no concerns
about post-IPO return volatility. Hence, the null Hypothesis 5 cannot be rejected.
Underpricing is insignificantly correlated to pre-IPO firm size. Furthermore, the coefficient signs change
between MAAR and AR. It is useful to note that book value of total assets owned by state-owned firms
may be unable to cover firm value, since many firms own a large number of huge assets, the majority of
which are out of operation. Therefore, we cannot reject the null Hypothesis 6.
State ownership is insignificantly related to underpricing despite negative coefficients as expected. The
result differs from Chinese market. However, unlike Cheung et al. (2009) and Chi and Padgett (2005),
who argue that the government may underprice IPOs to attract retail investors, we interpret this result that
high post-IPO state ownership level limits supply, leading to underpricing through supply-demand
interaction. Thus, we cannot reject the null Hypothesis 7.
3-month cumulative market return before first-trading day has a weak relation with underpricing in which
it is significantly correlated to AR at 10 percent level but insignificantly related to MAAR although
coefficient sign is consistent. Hence, the null Hypothesis 8 cannot be rejected.
Investment strategy for IPO stocks
Using the results derived from bootstrap method, we sort all the stocks regarding oversubscription rate
and reserve price. First, we sort the stocks into 3 percentiles from the highest to lowest oversubscription
rate and group them into HD-MD-LD categories, respectively. Similarly, we sort the stocks regarding
reserve price into HP-MP-LP groups. Next, we reconcile LD and LP group stocks to construct equally-
weighted LDP portfolio (consisting of lowest demand as well as reserve price). Do same things for HD
and HP group to obtain HDP portfolio (consisting of highest demand as well as reserve price). Finally, we
calculate MAAR and AR for the two final portfolios.
Table 9 reveals that an average adjusted return of LDP and HDP is 90% and -21% regarding MAAR as
well as 81% and -31% regarding AR, respectively. Difference in adjusted returns between LDP and HDP
is 112.39% (MAAR) and 112.95% (AR). This difference is significant at 5 percent and 1 percent level.
This implies that strategy investing in low demand and low reserve price stocks, on average, could
produce good performance for investors. The result is rather different from other emerging markets,
including similarly-featured Chinese market.
Table 9. Performance of investment strategy for IPO stocks
The table presents descriptive statistics and difference-of-means t-statistic for the initial return (MAAR or AR)
of LDP (low demand and reserve price IPOs) portfolio and HDP (high demand and reserve price IPOs). Panel A
shows descriptive statistics for MAAR and t-test results for difference of means between LDP and HDP
portfolios. Panel B reports descriptive statistics for AR and t-test results for difference of means between LDP
and HDP portfolios
Panel A
MAAR Mean Std. Dev
LDP 0.9065 1.2790
HDP

-2.2174 0.5658
Difference of means 1.1239
**

Difference-of-means t-statistic 1.82
Panel B
AR Mean Std. Dev
LDP 0.8113 0.7449
HDP

-0.3181 0.5501
Difference of means 1.1295
***

Difference-of-means t-statistic 2.86
***
,
**
,
*
indicate significance at the one, five and ten percent levels.

6. Conclusion
Main findings
This research finds evidence of underpricing for Vietnamese IPOs in which the degree of underpricing
varies from -89% to 371% with an average of 38% (MAAR) and 49.09% (AR). This level of underpricing
is lower than those of Chinese IPO market but higher than those of many developed markets. Investors
placing the successful minimum price can earn significantly higher return than the average return by
18.36%.
Two factors consistently affecting on the level of underpricing of Vietnamese IPOs are oversubscription
rate and reserve price. They are determinants that are directly related to an IPO auction. Market factor has
a weak impact. Fundamental factors such as firm age, listing delay, post-IPO return volatility, pre-IPO
firm size and post-IPO state ownership level are insignificantly correlated to underpricing. These results
are quite different from other prior studies. It seems that asymmetric information theories have a weak
power in explaining the level of Vietnamese IPO underpricing. Instead, with auction method used in
Vietnamese IPOs, demand and supply seem to be key elements determining IPO underpricing. We
believe this is a unique feature of Vietnamese market.
The results imply an investment strategy for IPO stocks. IPOs which offer lower reserve price produce
higher adjusted return, and IPOs offering lower over demand could well perform. A portfolio comprising
low demand and low reserve price IPO stocks has overperformed the market by 81% to 90%.
Unlike many other markets, such as U.S, U.K, China or Malaysia, we find no support for Vietnamese IPO
long-run underperformance for 12, 24 and 36-month intervals from the first-trading day. Along with
short-run underpricing evidence, this implies it is worth investing in Vietnamese IPOs.
Drawbacks
This research faces some drawbacks, particularly small sample size limitation and issues in collecting
data partly because of market features and regulations.
Our sample only comprises 69 IPOs. This is an objective and popular limitation in emerging markets
(likewise 34 IPOs in Boudriga et al. (2009) for Tunisia, 104 in Sullivan and Unite (2001) for Phillipine,
93 in Nurwati A. Ahmad-Zaluki (2012) for Malaysia, 50 in Sohail and Raheman (2009) for Pakistan, and
55 in Adjasi (2011) for Nigeria).
Underpricing measures are subject to over-the-counter market trading activities after IPO date but before
listing date. In the case of Vietnam, there are unofficial trading activities among investors in OTC market.
Without disclosure regulations for these activities, it is almost impossible to collect the first-trading day
price in OTC market. Furthermore, trading activities in OTC market are hand-to-hand or agreement
transactions, leading a large variation in price levels. Therefore, this study calculates first-trading day
return in the official markets with an assumption that an investor who buys stocks through IPO auction
can only sell them in post-listing first-trading day.

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