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

40 Pages Posted: 8 Jan 2010 Last revised: 18 Jan 2014

See all articles by Chandrasekhar Krishnamurti

Chandrasekhar Krishnamurti

University of South Australia

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: January 7, 2010

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 finding is that liquidity changes strongly predict long-term abnormal returns as well as accounting performance in the post-lockup period. Our results remain robust to the use of alternate procedures to characterize 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? (January 7, 2010). Available at SSRN: https://ssrn.com/abstract=1532996 or http://dx.doi.org/10.2139/ssrn.1532996

Chandrasekhar Krishnamurti (Contact Author)

University of South Australia ( email )

37-44 North Terrace, City West Campus
Adelaide, South Australia 5001
Australia

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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