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T. Chemmanur, C. Ornthanalai, P. Kadiyala, “Options on initial Public Offerings,” (Working Paper Series, presented by Chayawat Ornthanalai at the OptionMetrics Research Conference 2013)

T. Chemmanur, C. Ornthanalai, P. Kadiyala, “Options on initial Public Offerings,” (Working Paper Series, presented by Chayawat Ornthanalai at the OptionMetrics Research Conference 2013)

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 (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. 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.