HOT IPOS AND LOCKUP EXPIRATION — AN ANOMA LY?

Abstract

IPO lockup is defined as the restricted period during which certain insiders are prohibited from selling their holdings in the open market. Usually, the lead underwriter imposes the restriction, and the customary restriction period lasts for about 6 months. Different theories have been extended to predict the stock price behavior around the expiration day of IPO‐lockup. In this study, we will investigate whether the stock price behavior around the expiration day of IPO lockup is different for ‘Hot’ and ‘Cold’ IPOs. We hypothesize that the stock prices of ‘Hot’ IPOs, in terms of average returns, are less affected by the unlocking of a large volume of shares. On the other hand, for ‘Cold’ IPOs, investors, in particular, venture capitalists will have a tendency to dispose of their shares in order to preempt further decline in their wealth, and as a result we anticipate a significant decline in stock prices for Cold IPOs. Our initial results show that on the lockup expiration day, the market adjusted returns for all four categories of IPOs decline by more 1 percent however, only the decline for Hot IPOS is statistically significant. The results are robust even after controlling for various specifications of the market index.