Option Listing on the Equity of Newly Public Firms

51 Pages Posted: 18 Aug 2013 Last revised: 1 Jul 2021

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: June 18, 2021

Abstract

We show that equity prices of newly public firms decrease immediately after options have been listed, and that this effect persisted for one year. Relative to a similarly matched IPO firm without options listed, stock returns of a newly public firm fall by 75 bps per week after options start trading. 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. There is an overwhelming demand for put options on newly public firms for up to five months after options have been listed. A simple strategy that buys newly listed put options on IPO stock and held to maturity yields up to 6.3% monthly excess returns after transaction costs. 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, Option Listing on the Equity of Newly Public Firms (June 18, 2021). Rotman School of Management Working Paper No. 2311317, Pace University Finance Research Paper, 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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