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Can Liquidity Shifts Explain the Lockup Expiration Effect in Stock Returns?

38 Pages Posted: 12 Feb 2009 Last revised: 14 Nov 2013

Chandrasekhar Krishnamurti

University of Southern Queensland; University of Southern Queensland

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Tiong Yang Thong

Singapore Management University - Lee Kong Chian School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: February 11, 2009

Abstract

Several studies on the expiration of IPO lockups document a strong negative reaction even though the unlock event is devoid of any informational content. The empirical finding has remained a conundrum. In this paper, we find that changes in liquidity can account for the observed stock price reaction around lockup expiration. Specifically, firms which show improvement in liquidity subsequent to the unlock day experience positive abnormal returns in the post-expiration period, and vice versa. Another interesting conclusion that emerges from our research is that liquidity changes can predict future abnormal returns. Our results remain robust to the use of alternate procedures to characterize unexpected changes in liquidity.

Keywords: Lockup expiration, Illiquidity

JEL Classification: G14, G24, G32

Suggested Citation

Krishnamurti, Chandrasekhar and Subrahmanyam, Avanidhar and Thong, Tiong Yang, Can Liquidity Shifts Explain the Lockup Expiration Effect in Stock Returns? (February 11, 2009). EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1341465 or http://dx.doi.org/10.2139/ssrn.1341465

Chandrasekhar Krishnamurti (Contact Author)

University of Southern Queensland ( email )

P.O.Box 238 Darling Heights
Toowoomba, Queensland 4350
Australia

University of Southern Queensland ( email )

School of Accounting, Economics and Finance
Faculty of Business
Toowoomba, QLD 4350
Australia
61 7 4631 2941 (Phone)
61 7 4631 1770 (Fax)

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Tiong Yang Thong

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore 178899
Singapore

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