This paper analyses the expiration of IPO-lockup periods and its affects on stock returns using event study methodology. The study focuses on 5,171 IPOs with lockup agreements in the U.S. market between 1988 and 2018. Significant differences in cumulative abnormal returns due to various firm characteristics are explored.
This thesis is largely based on the paper of Field and Hanka (2001) and assesses whether the expiration of lockup periods results in abnormal returns and daily trading volume. For this purpose, an event study for 3,306 lockup agreements of IPOs over a 31-year period from 1988 until 2018 is performed. The sample is limited to the United States as the newly listed firms' domicile nation. The changes in daily trading volume around the expiration date of the lockup are also analysed. Moreover, the paper examines the length of the agreed lockup periods and whether tech firms react differently to the expiration from firms in other industries.
Table of Contents
1. Introduction
2. Data and Methodology
2.1. The Sample
2.2. Event Study Methodology
3. Results
3.1. Length of the Lockup Period
3.2. Abnormal Returns Around the Unlock Date Across All Firms
3.3. Venture Capital Backing
3.4. Tech vs. Non-Tech Firms
3.5. Development of Cumulative Abnormal Returns Over Time
3.6. Development of Daily Volume During the Event Window
3.7. Development of Bid-Ask Spreads During the Event Window
3.8. Firms with Multiple Lockup Days
3.9. Robustness Check – 180-Days Effect
4. Conclusion
Research Objectives and Key Topics
This paper examines the financial implications of the expiration of IPO-lockup periods on stock performance and trading behavior. The primary objective is to analyze whether the unlocking of shares held by insiders leads to significant abnormal returns and changes in trading volume, while exploring the influence of venture capital backing and industry affiliation on these market reactions.
- Analysis of stock price reactions to lockup expirations
- Examination of trading volume spikes around unlock dates
- Investigation of the impact of Venture Capital (VC) backing
- Comparative study between technology and non-technology firms
- Evaluation of bid-ask spread developments during the event window
Excerpt from the Book
1. Introduction
Lockup agreements, which restrict the selling of shares by specific stockholders for a pre-defined period of time, are a common feature of many initial public offerings [IPOs]. Lockup agreements are typically aimed at insiders, e.g. management or venture capital investors. The specific terms of such agreements are disclosed in the respective prospectus and are, thus, publicly available information. Lockups can have various potential objectives ranging from signalling used by high-quality firms to being a “commitment device to alleviate moral hazard problems” (Brav & Gompers, 2003, p. 6).
Various previous papers examine different aspects of the implications of lockup expirations on stock returns. While Field and Hanka (2001) focus on U.S. IPOs Nowak and Gropp (2002) limit their analysis to a segment of the German stock exchange called the “Neuer Markt”. The U.S. sample yields significantly negative abnormal returns around the unlock day and tests of volume changes, fractions of shares locked up and bid-ask spreads suggest these are due to a downward sloping demand curve and especially venture capitalists liquidate their shares aggressively once unlocked (Field & Hanka, 2001). The analysis of German IPOs on the “Neuer Markt” shows the same significantly negative abnormal returns and increased trading activity (Nowak & Gropp, 2002). Haman, Chalmers, and Fang (2017) assess the impact of lockup type on long run returns and growth opportunities and discover that returns are significantly lower and growth opportunities are significantly higher for Australian firms with mandatory lockups in comparison to those with non-mandatory. Goergen, Renneboog, and Khurshed (2006) analyse French and German lockups and obtain significant differences in the respective agreements between firms and also between investor groups within the same firm. Brav and Gompers find that lockups are a “commitment device to alleviate moral hazard problems” (2003, p. 1) as higher moral hazard in the after-market is associated with longer lockups.
Summary of Chapters
1. Introduction: Introduces the concept of lockup agreements in IPOs and outlines the motivation for examining their impact on market returns and trading behavior.
2. Data and Methodology: Describes the sample selection from the SDC database and explains the event study framework used to measure stock reactions.
3. Results: Presents the empirical findings, covering lockup durations, abnormal returns, trading volumes, bid-ask spreads, and industry-specific effects.
4. Conclusion: Summarizes the findings, noting consistent support for negative abnormal returns and significant volume increases post-lockup, and suggests directions for future research.
Keywords
IPO, Lockup Agreement, Initial Public Offering, Abnormal Returns, Event Study, Venture Capital, Market Efficiency, Trading Volume, Bid-Ask Spreads, Stock Market, Insider Selling, Financial Economics, Corporate Governance, Market Anomalies, Capital Markets
Frequently Asked Questions
What is the fundamental focus of this research paper?
The paper focuses on the financial effects of IPO-lockup expirations on stock prices and trading activity in the United States between 1988 and 2018.
What are the central themes discussed in the work?
Key themes include the impact of insider share unlocking on stock returns, the influence of venture capital backing, and the differences in market reactions between tech and non-tech firms.
What is the primary objective of this study?
The objective is to determine if the expiration of a lockup period triggers statistically significant abnormal stock returns and to analyze the correlation with increased trading volume.
Which scientific methodology is utilized?
The author employs an event study methodology, utilizing the market model to estimate normal returns and calculating cumulative abnormal returns (CAR) surrounding the unlock date.
What is covered in the main body of the paper?
The main body examines empirical results concerning lockup length, the role of VC backing, industry sectors, and robustness checks regarding the 180-day effect.
Which keywords best characterize this research?
Relevant keywords include IPO, Lockup Agreement, Abnormal Returns, Event Study, Venture Capital, and Trading Volume.
How does venture capital backing affect the stock reaction post-lockup?
The study finds that VC-backed firms experience more significant negative abnormal returns and higher trading volume surges, suggesting that venture capitalists liquidate their holdings more aggressively.
Does the industry sector influence the market reaction to lockup expirations?
Yes, the paper observes that tech firms accumulate more significant negative abnormal returns compared to non-tech firms following the expiration of the lockup period.
What do the results suggest regarding the market efficiency hypothesis?
The persistent abnormal returns around the unlock date suggest a challenge to the semi-strong form of market efficiency, indicating that investors may not fully anticipate the downward pressure of insider selling.
- Arbeit zitieren
- Oliver Terhechte (Autor:in), 2020, The Expiration of IPO-Lockup Periods, München, GRIN Verlag, https://www.hausarbeiten.de/document/906704
