Abstract
It is well documented that IPO stock prices decline without reversals around lockup expirations, creating a novel setting to examine the impact of option trading on stock price efficiency. I find that optionable IPO stocks’ prices experience significant declines prior to lockup expirations, while non-optionable stocks’ prices start to decline at and after expiration dates. Delta-adjusted order imbalances in option markets are negative prior to lockup expirations and even more negative when it is hard to borrow in the underlying stock markets. These results provide robust new evidence that derivatives trading helps make the underlying stock market more efficient.
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