Does Insider Trading Impair Market Liquidity? Evidence from IPO Lockup Expirations
40 Pages Posted: 27 Apr 2003
Date Written: November 22, 2002
We test the hypothesis that insider trading impairs market liquidity, by analyzing intraday trades and quotes around 1,497 IPO lockup expirations in the period 1995-1999. We find that, while lockup expirations are associated with considerable insider trading for some IPO firms, they have little effect on effective spreads. By contrast, two other liquidity measures, quote depth and trading activity, improve substantially. In the 23% of lockup expirations where insiders disclose share sales, spreads actually decline. These findings indicate that a large body of well-informed, blockholding insider traders can enter a market from which they had previously been absent, and substantially change trading volume and share price, without impairing market liquidity.
Keywords: Initial Public Offerings, Lockups, Insider Trading
JEL Classification: G00, G24, G3
Suggested Citation: Suggested Citation