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Does Insider Trading Impair Market Liquidity? Evidence from IPO Lockup Expirations

40 Pages Posted: 27 Apr 2003  

Charles Cao

Pennsylvania State University

Laura Casares Field

University of Delaware - Alfred Lerner College of Business and Economics

Gordon R. Hanka

University of Texas at Austin - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: November 22, 2002

Abstract

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

Cao, Charles and Field, Laura Casares and Hanka, Gordon R., Does Insider Trading Impair Market Liquidity? Evidence from IPO Lockup Expirations (November 22, 2002). Available at SSRN: https://ssrn.com/abstract=372220 or http://dx.doi.org/10.2139/ssrn.372220

Charles Cao

Pennsylvania State University ( email )

Department of Finance
Smeal College of Business
University Park, PA 16802
United States
814-865-7891 (Phone)
814-865-3362 (Fax)

HOME PAGE: http://www.personal.psu.edu/qxc2/cao.html

Laura Casares Field (Contact Author)

University of Delaware - Alfred Lerner College of Business and Economics ( email )

419 Purnell Hall
Newark, DE 19716
United States
302-831-3810 (Phone)

Gordon R. Hanka

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

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