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

  • Eli Ofek
  • Matthew Richardson
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    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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    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
    Contact details of provider: 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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