Options on Initial Public Offerings
60 Pages Posted: 18 Aug 2013 Last revised: 30 Mar 2020
Date Written: October 15, 2014
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: Suggested Citation