Options on Initial Public Offerings

Options on Initial Public Offerings

Thomas J. Chemmanur Boston College – Carroll School of Management

Chayawat Ornthanalai University of Toronto – Rotman School of Management

Padmaja Kadiyala Pace University – Lubin School of Business

August 1, 2013
Rotman School of Management Working Paper No. 2311317

Using a sample of IPOs from 1996 to 2008, we examine, for the first time in the literature, the determinants and consequences of option listing on the equity of newly public firms. We explore four important issues. First, we study the determinants of the time to list options following the IPO and find that options are listed earlier on venture backed firms and those with larger IPO proceeds, but later on IPOs with higher reputation underwriters. Second, we analyze the effect of option listing on subsequent long-run stock returns and find significant under-performance persisting for more than a year after listing. This under-performance is greater for venture backed firms, but smaller for IPOs underwritten with higher reputation underwriters. Third, we test three hypotheses regarding the causes of equity under-performance post option listing and find the following: a significant increase in the short-interest ratio after option listing, indicating a relaxation of the short-sale constraint on the IPO firm equity; a significant decrease in insider equity holdings in the IPO firm in the months following option listing, indicating significant insider selling of the stock; and significantly higher put prices relative to call prices for several months following option listing, indicating that informed speculators are using put options to take short positions in the IPO firm stock during this period. Finally, we analyze the profitability of investment strategies in the newly listed options on IPO firm equity, and find significant excess returns from investing in long-maturity put options and holding them to maturity.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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