August 13, 2013
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 (Initial Public Offerings). 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.