The IPO Lock-Up Period: Implications for Market Efficiency and Downward Sloping Demand Curves

By Eli Ofek, Matthew P. Richardson. 2000

133 citations recorded by the source corpus.

After an initial public offering, most existing shareholders are subject to a lock-up period in which they cannot sell their shares for a prespecifed time. At the end of the lock-up, there is a permanent and large shift in the supply of shares. The lock-up expiration is a particularly interesting event to study because it is (i) completely known and observable, and (ii) potentially meaningful economically given the existing literature on supply shocks. This paper investigates volume and price patterns around this period, and documents several interesting results. Specifically, even though the event is totally anticipated, there is a 1% - 3% drop in the stock price, and a 40% increase in volume, when the lock-up ends. Various explanations are considered and rejected, suggesting a new anomalous fact against market efficiency. However, convincing evidence is provided which shows that this inefficiency is not exploitable, i.e., arbitrage is not violated. This aside, the evidence points to a downward sloping demand curve for shares, with the most likely explanation pointing to a permanent, long-run effect.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/6c7f12264fe5ac6d9779432f2a2b9f462094509c

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Citations in the corpus

Venture Capital and IPO Lockup Expiration: An Empirical Analysis (2001, unknown): “The conclusions from the parametric results Table 2 about here IPO LOCKUP EXPIRATIONS 9 1 Field and Hanka (2000) and Ofek and Richardson (2000) explicitly examine bid and ask prices around lockup expiration.”
The Impact of Fundamentals on IPO Valuation (2009, unknown): “A third explanation for a positive relation between IPO values and post-IPO retention is based on the assumption of a downward-sloping demand curve for shares ( Ofek and Richardson, 2008 ).”
Dotcom Mania: The Rise and Fall of Internet Stock Prices (2003, unknown): “In contrast, we took a sample of non-internet related firms for the period prior to 1998 from Ofek and Richardson (2000) and still find a positive effect which suggests this anomaly has been persistent and is not purely internet-related.”
Paper millionaires: how valuable is stock to a stockholder who is restricted from selling it? ☆ (2001, unknown): “Adding to the importance of trading restrictions associated with insider share ownership in IPOs, it is often the case that management and active investors (such as venture capitalists) are subject to additional vesting agreements that go beyond the lockup period (Ofek and Richardson, 2000).”
Strategic IPO Underpricing, Information Momentum, and Lockup Expiration Selling (2002, unknown): “Studies by Field and Hanka (2001), Brav and Gompers (2000), Ofek and Richardson (2000), and Bradley et al. (2001) show that stock prices for new issues regularly decline at the time of the lockup expiration.”
Institutional Investor Preferences and Price Pressure: The Case of Corporate Spin-Offs (2003, unknown): “Ofek and Richardson (2000) utilize the shift in supply of stocks resulting from the end of the IPO lock-up period to provide evidence that stocks have a downward sloping demand curve. stringent fiduciary standards, as they are governed by common law and Employees Retirement Income Security Act…”
The Role of Lockups in Initial Public Offerings (2003, background): “Field and Hanka (2001) focus on explaining the price decline at lockup expiration.2 Ofek and Richardson (2000) attempt to explain the price decline at 2 Field and Hanka (2001) document the extent of early release by employing a small sample of insider transactions prior to lockup expirations (334…”
Does Insider Trading Impair Market Liquidity? Evidence from IPO Lockup Expirations (2004, background): “Bradley, Jordan, Roten, and Yi (2001), Field and Hanka (2001), and Ofek and Richardson (2000) find that lockup expirations result in a permanent, 40% increase in trading volume, and statistically significant stock price declines of about 1.5%.”
Asset Float and Speculative Bubbles (2006, unknown): “Price Change across the Lockup Expiration Date Empirical evidence suggests that stock prices tend to decline on the day of the event (see Brav and Gompers (2003), Bradley et al. (2001), Field and Hanka (2001), Ofek and Richardson (2000)).”