An option to cheat : an application of option theory to realize flipping in underpricing

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