Options on Initial Public Offerings

60 Pages Posted: 18 Aug 2013 Last revised: 30 Mar 2020

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, 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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