The Costs of Going Public

There are three costs associated with an initial public offering. First, the firm must consider the legal and administrative cost of making a new issue, including the cost of preparing registration statements and filing fees. Second, the firm should examine the underwriting commission — the gross spread between the offering price and what the firm receives per share, which goes to cover the underwriting, management, and selling fees on the issue. This commission can be substantial and decreases as the size of the issue increases. Figure 7.6 summarizes the average issuance and underwriting costs for issues of different sizes, reported by Ritter (1998).

Figure7.6: Issuance Costs by Size of Issue

Figure7.6: Issuance Costs by Size of Issue

□ Underwriting Commission

□ Issuance Expenses

<1.99 2.00 -4.99 5.00 - 9.99 10.00 - 20.00 - 50.00 - 100.00 -

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