Breaking Down IPO Barriers: Cultivating Conducive Retail Investment Environment

Abstract

The paper aims at providing a modeling framework on the barriers, which influence the retail investment decision in the initial public offering (IPO) market. Based on a structured literature review and nominal group-based expert discussions, eight major barriers were identified and they were assessed through the grey-DEMATEL methodology. The findings point out that information asymmetry and higher pricing by issuers are the most prominent barriers. High information asymmetry and a lack of understanding of IPO issuers' future prospects force investors to make decisions based on heuristics rather than on reliable and relevant information. The absence of a standard valuation method compels uninformed investors to perform a subjective valuation of IPO issuers. Investors become unable to distinguish between underpriced and overpriced IPOs. Thus, this study provides a supporting explanation for the “winner's curse” and the “hot issue market” phenomena. The current study suggests that the establishment of a favorable investment environment is an ongoing activity, and the regulators have to intervene frequently in order to achieve optimality.