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Option introduction, short-sale constraints, and stock price efficiency: New evidence from IPO lockup periods

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  • Wang, Li

Abstract

We examine whether option availability improves price efficiency of IPO stocks during the lockup periods. Using a difference-in-difference analysis, we show that before September 2008, optioned IPOs exhibit significantly higher price efficiency than non-optioned IPOs during lockup periods across three measures. This efficiency advantage coincides with a regulatory exemption that allowed option market makers (OMMs) to short sell without pre-borrowing shares or complying with “close-out” requirements. After the exemption was eliminated, the efficiency advantage disappears. Additional evidence from Deep-In-the-Money option trading and fail-to-deliver data supports the mechanism that options enhance price efficiency by relaxing short-sale constraints during lockup periods.

Suggested Citation

  • Wang, Li, 2026. "Option introduction, short-sale constraints, and stock price efficiency: New evidence from IPO lockup periods," Journal of Banking & Finance, Elsevier, vol. 184(C).
    • Handle: RePEc:eee:jbfina:v:184:y:2026:i:c:s0378426626000075
    DOI: 10.1016/j.jbankfin.2026.107633
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    Keywords

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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