Abstract
ABSTRACT The objective of this study was to verify the effects of the lock-up expiration on the behavior of prices and volumes in IPOs and follow-ons in the Brazilian market and to identify factors that may explain the existence and magnitude of abnormal returns. Few studies were found to investigate this phenomenon in Brazil, which were limited to the analysis of IPOs without examining the effect on follow-ons and the construction of abnormal accumulated returns compared to the Ibovespa, instead of benchmarks appropriate to each stock's risk. Lock-up clauses exist to mitigate the problem of information asymmetry in public offers but expose investors to the risk of a price drop after its expiration. Understanding the magnitude of this impact is essential for investors in the stock market. Through this article's analysis, investors will be able to estimate the magnitude of the price variation around the lock-up expiration, what factors explain the returns, and whether there are indications of short selling limitations. The event study method was applied, comparing returns to the Ibovespa and an individual reference portfolio composed of similar companies. Database: 313 offers that occurred on the Brazilian stock market between 2004 and 2019. Evidence of volume increase was found around the expiry of lock-up in IPOs, but the price drop was verified only in companies with private equity funds as shareholders. In follow-ons, in which the asymmetry of information about the issuer is less pronounced, the opposite situation was verified. There are several extensions and lock-up formats worldwide, which provide different impacts on volume and price. This article contributes to the literature when analyzing this event in Brazil and extending the analysis to follow-ons. A possible interpretation for the phenomenon is the restrictions on short-selling in the Brazilian market.
Highlights
With the more significant development and sophistication of Brazil’s capital market and the growing demand for greater transparency, clear rules, and equity in the treatment of minority investors, B3 announced, in the early 2000s, the creation of Differentiated Levels Corporate Governance Practice
When examining what happens to the stock price around the lock-up expiration, we investigate, indirectly, if there are restrictions on the sale discovered in the Brazilian market, preventing arbitrage before maturity
Panel A corresponds to the cumulative abnormal return (CAR) built from the Ibovespa benchmark, and Panel B built from the benchmark adjusted to the risk of each issue in terms of size and BTM, according to the methodology proposed by Ritter (2006)
Summary
With the more significant development and sophistication of Brazil’s capital market and the growing demand for greater transparency, clear rules, and equity in the treatment of minority investors, B3 (formerly BM&FBovespa) announced, in the early 2000s, the creation of Differentiated Levels Corporate Governance Practice. Segments of voluntary adhesion were listed for companies that commit to adopt acceptable corporate governance practices in addition to that required by the legislation in force. In this context, most new companies intending to issue shares, whether through IPOs or follow-ons, sought to meet the best corporate governance practices to adhere to the differentiated listing segments, expanding access to a greater range of investors and raising the value perception of companies. In IPOs, 0% of the shares held by insiders (controllers, administrators, and other individuals who have access to privileged information and not disclosed to the market) could be traded in the first 180 days after the IPO event. Shares held by insiders could only be traded after 90 days
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