Does the Shake Shack IPO mean you should stop eating there?

A simple theory of IPOs suggests that they arrive when a product or company is experiencing “peak buzz,” or at least when the insiders in the privately held company think they are at or near peak buzz. This will maximize the expected returns on the IPO when it comes to market.

When it comes to food, peak buzz usually arrives a wee bit after peak quality, given reputational lags. So if you are seeing peak buzz, it is probably time to bail on the restaurant, at least on a restaurant which is going to be sold. Bailing on the restaurant may in fact be slightly overdue.

After an IPO, the equity share of the original creators — in this case Danny Meyer — is diluted. Meyer’s incentive to maintain quality standards and his personal brand name is weakened. The subsequent public shareholders are more likely to insist on a less risky and more mass market approach, which is not in tune with what you, highly intelligent reader of this blog, are likely to prefer.

In other words, both the signaling and the moral hazard arguments suggest that soon you should stop eating at Shake Shack. Alternatively, perhaps you should now go lots of times, in quick succession, given that quality will decline even more and you must stock up on your fix as a kind of intertemporal substitution.

Originally posted on Marginal Revolution – click to see comments and suggestions.

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