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An Option to Cheat: An Application of Option Theory to Realize Flipping in Underpricing

Author

Listed:
  • Jovan Stojkovic

    (Swiss Finance Institute)

Abstract

The paper proposes a novel direction to rationalize and quantify investors' flipping behavior and its effect on underpricing in IPOs through the use of a structural approach mode. The outcome is a proxy value that replicates investors' flipping behavior. When tested empirically, the model predicts that on average 25% of underpricing exists to protect long-term investors from the detrimental effects of flippers. In aggregate terms, this implies that each issuing firm from 1986 to 2013 lost an average of $4.8 million due to flipping.

Suggested Citation

  • Jovan Stojkovic, 2013. "An Option to Cheat: An Application of Option Theory to Realize Flipping in Underpricing," Swiss Finance Institute Research Paper Series 13-74, Swiss Finance Institute, revised Aug 2015.
    • Handle: RePEc:chf:rpseri:rp1374
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    File URL: http://ssrn.com/abstract=2371626
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    More about this item

    Keywords

    Initial Public Offerings; Real Options; Stock Flipping; Underpricing; Money Left On The Table; Facebook Inc.; LinkedIn Corp;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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