Trading and the Information Environment of IPO Stocks Around Lockup Expiration: Evidence from Intraday Data

Abstract

The significant price drop for IPO stocks upon lockup expiration seems to contradict the market efficiency hypothesis. To gain insight into this phenomenon, I examine the trading activity and the information environment around IPO lockup expiration. First, I find that active buyer-initiated trades increase significantly before lockup expiration, particularly for small-size trades and for stocks with high dispersion of market opinion and high visibility. I provide and evaluate three possible explanations for the money-losing active buying before lockup expiration, including negative supply shocks in the equity lending market, demand induced insider selling, and noise trading. The evidence is consistent with the noise trading explanation. Further, I find that before lockup expiration, IPO stocks typically announce optimistic quarterly earnings exceeding analysts' consensus forecasts to create positive publicity. Overall, analysts are over-optimistic about the stocks they cover. The price drop around lockup expiration is significant positive correlated with venture backing, analysts' earnings forecast bias, and forecast dispersion. Second, I study the information environment of IPO stocks around lockup expiration. Corporate insiders are likely to possess better information about firm fundamentals and future growth potential. Upon lockup expiration, these informed investors are allowed to sell their holdings in the open market. What impact these trades may have on the information environment, particularly information asymmetry, of the stock market? I find that information asymmetry of the IPO stocks experiences little change after the unlock day. This suggests that insider trading upon lockup expiration is unlikely to be driven by private information. Because corporate insiders' wealth is usually concentrated in the newly public companies, the selling may reflect insiders' diversification effort.