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Chayawat Ornthanalai (Rotman School of Management)

4 October 2022 @ 12:00 - 13:15

 

Details

Date:
4 October 2022
Time:
12:00 - 13:15
Event Categories:
,
Academic Events

Barbarian at the Gate? Equity Option Trading on Newly Public Firm


Abstract. We document strong evidence for the negative and persistent impact of option listing on stock returns of newly public firms. The result is not explained by exchanges’ timing of when to list options and is specific to newly public firms. Option listing that is not accompanied by the start of option trading or listing on seasoned firms do not yield the same effect. We rule out the relaxation of short-sale constraint as an explanation. In fact, we find that shares borrowing cost and quantity-on-loan demanded increase significantly after option listing suggesting that short-sale constraint worsens. Directional option volume sourced by investor types shows that after option listing, firm proprietary traders accumulate large negative exposure on newly public shares by buying puts and writing calls while public customers trade in the opposite direction. Negative option position held by proprietary traders strongly predicts lower stock returns and explains the increased short-selling demand and cost. Our results highlight the role of option market as a venue for information-based trading in the IPO aftermarket rather than alleviating short-sale constraint.