The Role of IPO Lock-ups on Insider Trading

This paper investigates the controversial phenomenon associated with initial public offerings – the role of lock-up provisions, which are contractual arrangements that prevent pre-IPO shareholders from trade during a specified time period subsequent to the offer. Lock-up controversy arises from the fact that being completely anticipated corporate provision, around the date of expiry the stock price falls abruptly, which poses challenges to Fama’s (1969) efficient market hypothesis. With a sample of 733 unique IPO deals conducted on the US market during 2005-2017 we document the presence of abnormal returns and abnormal trading volume. Therefore the US IPO market does not exhibit semi-strong efficiency since prices do not incorporate the lock-up effect. Moreover, we find that insider sales around the expiry are a powerful predictor for abnormally negative returns. In our paper we frequently refer to the course paper “Behavioural Corporate Finance” by Andrey Romanchenko (2015), ICEF MSc student.