Lock-In Agreements in the UK: Is There a Fourth IPO Anomaly?

Abstract

When a company offers shares in an Initial Public Offering (IPO), insiders typically undertake a lock-in agreement that prohibits them from selling their shares for a specified period of time after the IPO. Recent evidence from the US has shown that there are predictable share price movements at the time of expiry of these lock-in periods thus challenging the Efficient Markets Hypothesis. Using a sample of 188 firms that went public on the London Stock Exchange (LSE) during 1992-1998, we focus on the characteristics of the lock-in agreements in the UK and also on the share price behaviour of the firms around the lock-in expiry date. We find that the lock-in contracts of the LSE listed firms are much more complex, varied and diverse as compared to the US contracts, which are usually standardised at 180 days after the IPO. We also find evidence of negative share price movements at and around the lock-in expiry dates thus providing further support to the US evidence. The deterioration in stock returns around the expiry date is particularly pronounced for high-tech companies.