Finance Assignment: Analysis of Short-Run IPO Underpricing in Vietnam

This finance assignment analyzes the phenomenon of short-run Initial Public Offering (IPO) underpricing in the Vietnamese stock market. The study examines 87 stocks listed on HNX, HOSE, and UPCoM, referencing the article "Initial public offering underpricing in the Vietnamese market." The report defines IPO underpricing as the increase in stock value from the initial offering price to the first-day closing price, identifying an underpricing rate of approximately 10.17%. Key factors influencing underpricing, including stock return volatility, firm size, intangible assets, and financial leverage, are discussed. The assignment highlights the strategic benefits of underpricing, such as attracting investors and raising capital, while also considering the perspectives of both investors and companies. The conclusion emphasizes the importance of a well-defined strategy aligned with market conditions to achieve capital-raising objectives.

Running head: FINANCE
Finance
Name of the student:
Name of the university:
Author Note:

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Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Conclusion:................................................................................................................................4

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Introduction:
The aim of the assignment is to deal with the occurrence of short-run IPO
underpricing and ability to compare and find the reasons behind such results. The incidence
of short-run IPO underpricing in Vietnamese stock market has been depicted in the conducted
study. Actually there are total of 87 stocks listed in HNX, HOSE and UPCoM. The study is
further based on the article which is Initial public offering underpricing in the Vietnamese
market (Keep.hcmiu.edu.vn. 2019).

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Discussion:
The underpricing of the IPO means that an increase in the value of stock starting from
the initial offering price to the first-day closing price in the trading. As per the analysis it is
found that about 10.17% of the IPO is underpriced in this particular segment. The significant
factor of underpricing, is dealt by four variables which are the volatility of stock return, firm
size, intangible assets and financial leverage level correspondingly. (Arcand, Berkes and
Panizza 2015).
The policy of underpricing in the short run IPO will automatically attract the potential
customers in the market. This is the main reason as the company needs to adopt this policy
for further improving the share value of the business. The underpricing policy varies from
country to country and hence the management strategies in that case also varies (Gitman,
Juchau and Flanagan 2015).
Underpricing of the company is frequently which is expressed as the percentage
difference between the closing price and the offer price of that particular stock. From the
point of view regarding the efficiency of the market, major tenacious differences in case of
the returns which is generated over the years, months and days (Härdle, Chen and Overbeck
2017). The underpricing policy of the particular stock automatically attracts the customers all
over the world in order to further increase the value of the shares. The IPO stocks which are
traded heavily in the market are the potential investors in this case tries to buy and sell the
shares in the market. This will automatically increase the trading in the current stock market
where the company will be able to generate revenue on a short run basis (Fracassi 2016).
There are certain benefits of the short term underpricing policy of the IPO which is
the process of going public through an IPO (Pilbeam 2018). This is the possible way in order
to raise lot of capital through the large number of investors in the market. This will be helpful

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for the company in order to generate cash into the business, for the purpose of research,
infrastructure, or further expansion of the business. Therefore, Initial Public Offerings or
issue of shares in the market for raising capital is a common practice among the companies
(Ehrhardt and Brigham 2016). Every company is having an intrinsic value, which is backed
by the net worth or the assets of the company. Market price of share of companies depends on
certain market conditions or situations, but its value or the intrinsic value depends on the
future profitability and financial position of the company. Sometimes, companies may issue
shares at a lower price than the market price of the share, and it is known as the underpricing
of shares. From the above discussion, it can be observed that, the selected company issued
their IPO at a price of $1.00 while the market price of the share was $1.53 that means they
have issued the shares at price lower than the market price. Such instances are known as the
underpricing of IPO (De Grauwe and Grimaldi 2018).
Under-pricing of IPOs is beneficial for investors as at the time of liquidation or the
buyback of shares the investors will be receiving higher amount than the purchase price.
Investors are interested in two types of return, one is the dividend yield or the interest income
and the other is the capital appreciation or the capital yield. If the shares can be bought at a
lower price, then there would be a higher capital appreciation. In attraction of that, investors
will show interest in the shares of the company and invest their fund in that company.
Therefore, underpricing of IPOs are having various aspects. One is investors’ perspective and
the other is the company’s perspective.
In the Vietnamese stock market, it can be noticed from various empirical studies and
research that, most of the companies are issuing their shares at a price lower than the market
price. It has become a common practice in the Vietnamese stock exchange. There are
numerous instances where companies failed to raise capital through IPOs. Investors showed
less interest in their IPOs. An important such case is the IPO of Spatial Technology Inc., their

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target to raise capital through IPO in early 1992 and 1996 failed due to the same reason. To
avoid such type of a situation most of the Companies underpricing their shares at the time of
IPOs.
Conclusion:
From the above analysis and discussion, it can be concluded that, it’s a good corporate
strategy for companies to lower the share price at the time of IPO to attract investors and to
raise capital through issue of shares. In the given case study, also the same trend has been
found. Under-pricing of IPOs from the article is having some benefits to the company as well
as to the investors. Lastly, it can be said that, there must be a proper strategy according to the
prevailing market situation to achieve their capital raising objectives.

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References
Arcand, J.L., Berkes, E. and Panizza, U., 2015. Too much finance?. Journal of Economic
Growth, 20(2), pp.105-148.
De Grauwe, P. and Grimaldi, M., 2018. The exchange rate in a behavioral finance
framework. Princeton University Press.
Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage
learning.
Fracassi, C., 2016. Corporate finance policies and social networks. Management
Science, 63(8), pp.2420-2438.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Härdle, W.K., Chen, C.Y.H. and Overbeck, L. eds., 2017. Applied quantitative finance (Vol.
2). Springer.
Keep.hcmiu.edu.vn. (2019). Initial public offering underpricing in Vietnamese market.
[online] Available at: http://keep.hcmiu.edu.vn/handle/123456789/2748 [Accessed 29 Apr.
2019].
Pilbeam, K., 2018. Finance & financial markets. Macmillan International Higher Education.