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.