Issuer Readiness and Financing Choices in a Bank-Dominated Economy: Evidence from Latvian Firms

Despite extensive regulatory harmonisation under the European Capital Markets Union (CMU), equity market development in several peripheral EU economies remains critically weak. While institutional infrastructure exists, issuer participation in public markets remains limited. This study aims to determine the capital market potential by assessing issuer-side financial readiness, with a specific focus on Latvia as a representative small EU, bank-dominated capital market. The study adopts a mixed-methods research design. Quantitatively, fuzzy c-means clustering is applied to firm-level financial statement data for 4070 Latvian non-financial companies for the period 2022–2023 to identify latent groups of potential equity issuers based on turnover, EBIT, equity, and employment size. Qualitatively, an expert-peer forum and a PESTEL framework are used to analyse institutional, political, economic, and behavioural barriers to IPO participation. The clustering analysis identifies 49 firms with comparatively strong financial and organisational characteristics consistent with potential issuer readiness; the analysis does not assess their willingness or complete organisational preparedness to undertake an IPO. Despite this latent issuer potential, Latvia recorded only two IPOs in 2024. The results show that Latvia has a critical mass of financially viable potential issuers, while IPO inactivity is driven by several factors. Qualitative findings reveal that issuer participation is constrained primarily by entrenched bank-financing dominance, disclosure aversion, weak political market signalling, low financial literacy, and insufficient market liquidity rather than by a lack of financially capable firms. The findings highlight several policy implications for increasing capital market potential, including targeted support to improve firms’ readiness for public issuance, selective listings of state-owned enterprises to strengthen market signalling, and initiatives to improve financial literacy and enhance equity investment culture.