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

Jovan Stojkovic
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Jovan Stojkovic: Swiss Finance Institute

No 13-74, Swiss Finance Institute Research Paper Series from 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.

Keywords: Initial Public Offerings; Real Options; Stock Flipping; Underpricing; Money Left On The Table; Facebook Inc.; LinkedIn Corp (search for similar items in EconPapers)
JEL-codes: C6 G14 G24 G32 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2013-12, Revised 2015-08
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1374

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