Why Do Insiders Sell Shares Following IPO Lockups?

Abstract

We examine the long run stock performance of IPO firms following lockup expiration when insiders are allowed to release their shares from the perspectives of two hypotheses. The portfolio diversification hypothesis notes that corporate insiders may wish to diversify their portfolios and sell their shares without conveying material information by their actions. Accordingly, this hypothesis predicts that insider selling does not have predictive power for the subsequent IPO long run performance following lockup expiration. The informative selling hypothesis posits that insider sales, particularly sales by senior corporate insiders, will convey unfavorable signals to investors, and that IPO firms with abnormal net post-lockup insider sales exhibit poor long run performance. Our results suggest that non-senior executive insider sales are driven more by diversification, while senior executive sales are largely consistent with the informative selling hypothesis.