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Insider Trading and the Long-Run Performance of IPOs

62 Pages Posted: 19 Mar 2010  

Hafiz Hoque

University of York; City University London - Sir John Cass Business School

Meziane Lasfer

City University London - Sir John Cass Business School

Date Written: March 14, 2010

Abstract

We find significant impact of insider trading activity on the long-run performance of IPOs. We show that, at the aggregate, insiders are net sellers in IPOs that generate positive long-run returns, while they are net buyers in those that underperform. When we analyse individual trades, we find that they adopt contrarian strategies, but their information effectiveness is weak. They buy in underperforming IPOs, but while share prices increase significantly on the announcement date, they become negative in the post trade period. These buy trades are consistent with the price support hypothesis, but, since prices do not revert, their signal is not effective. In contrast, they sell in overperforming IPOs, but the announcement and post-event period are mainly insignificant, suggesting that insiders sell when their IPO reaches its optimal value, and the pre-trade returns drive the excess performance of net sell IPOs. Overall, unlike previous evidence, the direction of stock price reaction to insider trading in IPOs is not consistent with the expected performance, because the valuation uncertainty of IPOs makes the precision of the information content of insider trading weak and the profitability of insiders low. Thus, our results do not support strongly the agency conflict, and the trading on private information hypotheses, and in terms of signalling, insider trades reflect more the past than the future performance.

Keywords: Long run IPO performance, insider trades, London Stock Exchange, market timing

JEL Classification: G12, G14, G24

Suggested Citation

Hoque, Hafiz and Lasfer, Meziane, Insider Trading and the Long-Run Performance of IPOs (March 14, 2010). Available at SSRN: https://ssrn.com/abstract=1570762 or http://dx.doi.org/10.2139/ssrn.1570762

Hafiz Hoque

University of York ( email )

The York Management School
York, YO10 5GD
United Kingdom
+44 (0) 7515890949 (Phone)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44(0)7515890949 (Phone)
+44(0)2070408546 (Fax)

Meziane Lasfer (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
Great Britain
+44 20 7040 8634 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/m.a.lasfer/

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