Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

More on Abolishing Blogs

I received many comments on my blog post regarding Pritchard’s proposal on abolishing IPOs. Several comments suggested that while this might reduce losses by retail investors on hot IPOs, it would not eliminate it. I agree completely. Another set of comments asked whether the proposal would deny investors the opportunity to earn high rates of return in IPOs. This is a more subtle issue because the average rate of return on IPOs is nothing great (for the buy and hold investor, it is in fact a below average rate of return). However, many IPOs are “lottery stocks” – though the expected return is low, there is a small probability of very high return (similar to that in a lottery ticket).

If one assumes that retail investors are leverage constrained, these lottery stocks might be attractive to some categories of investors. I recall reading long ago that when Thai telecom tycoon Thaksin Shinawatra wanted to take his company public, he chose to launch the IPO just before the launch of the telecom satellite that was crucial for his business. By doing so, he offered investors an opportunity to gamble on the successful launch of the satellite. Both the IPO and the satellite launch were successful, and years later, he went on to become the Prime Minister of his country.

If one thinks about it carefully, Pritchard’s proposal would not rule out such IPOs, because the only requirement is a seasoning period of continuing disclosures. He does not propose that IPO should happen only after the business model stabilizes.

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One response to “More on Abolishing Blogs

  1. tangentstyle September 23, 2012 at 10:01 pm

    “If one thinks about it carefully, Pritchard’s proposal would not rule out such IPOs, because the only requirement is a seasoning period of continuing disclosures. He does not propose that IPO should happen only after the business model stabilizes.”

    I think this is the key point. Appreciate the follow-up.
    TS

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