The IPO Lock-Up Period: Implications for Market Efficiency and Downward Sloping Demand Curves

40 Pages Posted: 11 Nov 2008

See all articles by Eli Ofek

Eli Ofek

New York University (NYU) - Department of Finance

Date Written: January 2000

Abstract

After an initial public offering, most existing shareholders are subject to a lock-up period in which they cannot sell their shares for a prespecifed time. At the end of the lock-up, there is a permanent and large shift in the supply of shares. The lock-up expiration is a particularly interesting event to study because it is (i) completely known and observable, and (ii) potentially meaningful economically given the existing literature on supply shocks. This paper investigates volume and price patterns around this period, and documents several interesting results. Specifically, even though the event is totally anticipated, there is a 1% - 3% drop in the stock price, and a 40% increase in volume, when the lock-up ends. Various explanations are considered and rejected, suggesting a new anomalous fact against market efficiency. However, convincing evidence is provided which shows that this inefficiency is not exploitable, i.e., arbitrage is not violated. This aside, the evidence points to a downward sloping demand curve for shares, with the most likely explanation pointing to a permanent, long-run effect.

Suggested Citation

Ofek, Eli, The IPO Lock-Up Period: Implications for Market Efficiency and Downward Sloping Demand Curves (January 2000). NYU Working Paper No. FIN-99-054, Available at SSRN: https://ssrn.com/abstract=1298279

Eli Ofek (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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