Understanding First-day Returns of Hospitality Initial Public Offerings

Excerpt] The decision for a company to issue shares publicly for the first time is not to be taken lightly. The manager-owner of a private firm must carefully weigh the benefits of an initial public offering (IPO) against the costs. Potential benefits include the ability to raise capital in the public markets on more attractive terms than in private circles; increased liquidity for managers and other insiders who wish to sell ownership stakes; and increased recognition and credibility with customers, employees, and suppliers. These benefits, however, come at considerable direct and indirect costs. For U.S. firms, the direct costs, such as investment banking commissions, average about 11 percent of IPO proceeds.1 Less obvious, but sometimes more painful for issuing firms, is an additional indirect cost commonly referred to as “IPO underpricing.”