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

40 Pages Posted: 17 Mar 2000  

Eli Ofek

New York University (NYU) - Department of Finance

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

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 prespecified 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.

JEL Classification: G31, G32

Suggested Citation

Ofek, Eli and Richardson, Matthew P., Large the IPO Lock-Up Period: Implications for Market Efficiency and Downward Sloping Demand Curves. Available at SSRN: https://ssrn.com/abstract=207908 or http://dx.doi.org/10.2139/ssrn.207908

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

Matthew P. Richardson

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

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0349 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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