The underpricing and long-run underperformance of initial public offerings: evidence from Vietnam

Abstract

We examine a sample of listed firms in Vietnam Stock Market from January 2005 to July 2012 to find evidence for initial public offering (IPO) underpricing and long-run underperformance. The study employs market-adjusted measures and cross-sectional analysis. 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. Our finding for impact of reserve price contributes to literature about determinants of underpricing in an auction mechanism. This implies managers should prudently take it into consideration before proceeding with an IPO. The results also suggest a strategy which invests in IPO stocks having low oversubscription rate and low reserve price can overperform the market.