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

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  • Eli Ofek
  • Matthew Richardson
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    Abstract

    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.

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    Bibliographic Info

    Paper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 99-054.

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    Date of creation: Jan 2000
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    Handle: RePEc:fth:nystfi:99-054

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    Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126
    Phone: (212) 998-0100
    Web page: http://w4.stern.nyu.edu/finance/
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    Cited by:
    1. Harper, Joel T. & Johnston, Jarrod & Madura, Jeff, 2004. "Follow-on offerings," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 251-264, January.
    2. Harrison Hong & Jose Scheinkman & Wei Xiong, 2005. "Asset Float and Speculative Bubbles," NBER Working Papers 11367, National Bureau of Economic Research, Inc.
    3. Aggarwal, Rajesh K. & Krigman, Laurie & Womack, Kent L., 2002. "Strategic IPO underpricing, information momentum, and lockup expiration selling," Journal of Financial Economics, Elsevier, vol. 66(1), pages 105-137, October.
    4. Goergen, M. & Renneboog, L.D.R., 2005. "Shareholder Lock-In Contracts: Share Price and Trading Volume Effects at the Lock-In Expiry," Discussion Paper 2005-030, Tilburg University, Tilburg Law and Economic Center.
    5. Jarrod Johnston & Jeff Madura & Joel Harper, 2005. "Interaction Between Short Selling and Potential Insider Selling in the IPO Aftermarket," Journal of Financial Services Research, Springer, vol. 27(3), pages 283-302, September.
    6. Karpoff, Jonathan M. & Lee, Gemma & Masulis, Ronald W., 2013. "Contracting under asymmetric information: Evidence from lockup agreements in seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 110(3), pages 607-626.
    7. Goergen, Marc & Mazouz, Khelifa & Yin, Shuxing, 2010. "Price, volume and spread effects associated with the expiry of lock-in agreements: Evidence from the Hong Kong IPO market," Pacific-Basin Finance Journal, Elsevier, vol. 18(5), pages 442-459, November.
    8. Ang, James S. & Kraizberg, Elli, 2004. "An analysis of a strategy for management to separate and reward supportive shareholders," Journal of Corporate Finance, Elsevier, vol. 10(4), pages 639-658, September.
    9. Eli Ofek & Matthew Richardson, 2001. "DotCom Mania: The Rise and Fall of Internet Stock Prices," NBER Working Papers 8630, National Bureau of Economic Research, Inc.

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