Options on Initial Public Offerings

60 Pages Posted: 18 Aug 2013 Last revised: 27 Aug 2019

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Chayawat Ornthanalai

University of Toronto - Rotman School of Management

Padma Kadiyala

Pace University - Lubin School of Business

Date Written: October 15, 2014

Abstract

We analyze the determinants and consequences of option listing on IPO firm stock. We find that options are listed earlier on venture-backed and lower-reputation underwriter IPOs. We find a significant decrease in stock returns immediately after option listing, persisting for a year. Analyzing the determinants of this equity underperformance, we find a permanent threefold increase in short-interest ratio and aggressive insider selling in IPO equity following option listing. Further, buying newly listed put options on IPO stock yields up to 6.3% monthly excess returns. Overall, we find that option listing relaxes short-sales constraints on IPO equity, thereby correcting short-run overvaluation.

Keywords: IPOs; Option listing; Long-run stock returns; short-sale constraint

JEL Classification: G14; G12; G24

Suggested Citation

Chemmanur, Thomas J. and Ornthanalai, Chayawat and Kadiyala, Padma, Options on Initial Public Offerings (October 15, 2014). Rotman School of Management Working Paper No. 2311317; Pace University Finance Research Paper No. 2013/05. Available at SSRN: https://ssrn.com/abstract=2311317 or http://dx.doi.org/10.2139/ssrn.2311317

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Chayawat Ornthanalai (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Padma Kadiyala

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
914-773-3620 (Phone)

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