Option-implied lottery demand and IPO returns

Maik Dierkes, Jan Krupski and Sebastian Schroen

Journal of Economic Dynamics and Control, 2022, vol. 138, issue C

Abstract: We study the impact of time-varying lottery demand on first-day returns and the poor long-term performance of IPOs. Lottery demand – measured in terms of option-implied probability weighting – is associated with significantly higher first-day returns, tantamount to higher IPO underpricing and more money left on the table. Interacting the time variation in lottery demand with cross-sectional expected skewness reveals that IPO returns are particularly driven by the interaction between market-wide lottery demand and asset-specific lottery characteristics. When expected skewness meets low lottery demand, there is virtually no effect of skewness on first-day returns. In the long run, IPOs issued in high lottery demand regimes are more likely to perform poorly for up to five years after the IPO.

Keywords: IPO; Lottery demand; Skewness preferences (search for similar items in EconPapers)
JEL-codes: G12 G41 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:138:y:2022:i:c:s0165188922000616

DOI: 10.1016/j.jedc.2022.104356

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