Details
| Original language | English |
|---|---|
| Article number | 104356 |
| Journal | Journal of Economic Dynamics and Control |
| Volume | 138 |
| Early online date | 8 Mar 2022 |
| Publication status | Published - May 2022 |
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
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Economics and Econometrics
- Mathematics(all)
- Control and Optimization
- Mathematics(all)
- Applied Mathematics
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In: Journal of Economic Dynamics and Control, Vol. 138, 104356, 05.2022.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Option-implied lottery demand and IPO returns
AU - Dierkes, Maik
AU - Krupski, Jan
AU - Schroen, Sebastian
N1 - Funding Information: We thank Lena Dräger, Marcel Prokopczuk, and Fabian Hollstein for helpful comments. We would also like to thank co-editor Xue-Zhong (Tony) He, the associate editor, and an anonymous reviewer for their useful suggestions and comments. Moreover, we are grateful to Jay R. Ritter and Kenneth R. French for the provision of research data.
PY - 2022/5
Y1 - 2022/5
N2 - 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.
AB - 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.
KW - IPO
KW - Lottery demand
KW - Skewness preferences
UR - http://www.scopus.com/inward/record.url?scp=85127335868&partnerID=8YFLogxK
U2 - 10.1016/j.jedc.2022.104356
DO - 10.1016/j.jedc.2022.104356
M3 - Article
AN - SCOPUS:85127335868
VL - 138
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
SN - 0165-1889
M1 - 104356
ER -