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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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    Cited by:
    1. Harrison Hong & José Scheinkman & Wei Xiong, 2006. "Asset Float and Speculative Bubbles," Journal of Finance, American Finance Association, vol. 61(3), pages 1073-1117, 06.
    2. Tereza Tykvová, 2003. "The Role of the Value Added by the Venture Capitalists in Timing and Extent of IPOs," CFS Working Paper Series 2003/25, Center for Financial Studies.
    3. 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.
    4. 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.
    5. 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.

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