Underpricing of Initial Public Offerings : case: Ho Chi Minh Stock Exchange

Abstract

Initial public offering (IPO) is a favorite investing channel particularly because of the stock’s tendency to be priced under its real value. This underpricing phenomenon prompts a large initial return for investors once the stock starts to circulate on an exchange. The return rate is especially high in developing countries, and therefore attracts great interest from international investors. Vietnam is among the most promising markets, yet there is a serious shortage of valuable knowledge about IPOs that prevents investors from tapping a lucrative investing opportunity.

The aim of this thesis is to aid investors in venturing into Vietnamese equity markets. Specifically, the author examines, as a case study, the Ho Chi Minh Stock Exchange and various issues surrounding IPOs in that market. The results aim to clarify the feasibility of IPOs as an investing channel, and determine factors influencing underpricing level. This study utilizes the deductive method with a combination of qualitative and quantitative approaches. Data was collected from a number of sources, ranging from books, journals and reports to personal observations and financial databases. Moreover, the author gained invaluable insights from interviews with experts in the investment banking business.

An investigation into the underpricing level of IPOs and the determinants of underpricing is presented in the empirical portion of the thesis. The author examines return rate across different time frames, taking into account local features and return rates of comparable markets. Next, analysis on the determinants of the underpricing level identifies the weight of each factor on the underpricing level. Finally, a multiple regression analysis is conducted to affirm the findings in this study.

Findings in the empirical part suggest a substantial return rate compared to other markets. Thus the author finds investing in Vietnamese IPOs to be very advantageous and advises international investors to do so. Moreover, two stock portfolios are provided. Each portfolio describes characteristics of a typical underpriced stock, and provides a list of companies that fit these criteria. These characteristics should serve as guidance for investors looking to invest in Vietnamese IPOs.