In this study I examine the case of lockup period expirations for 142 IPOs in Germany between 2000 and 2019. I find significant abnormal returns around the expiration date of lockup periods during which existing shareholders are prevented from selling their shares. Both, abnormal returns and abnormal trading volumes around the unlock day are much larger for firms financed by venture capital or private equity. These findings are robust to different market models and are not due to market microstructure effects. When examining the cause for the observed abnormal returns abnormal trading volume and company size become prominent.
Table of Contents
1 Introduction
1.1 Related Literature
2 Applied IPO Practice and Theory of Lockups
3 IPO Lockup Expiration and Returns
3.1 Data and sample design
3.2 Methodology
3.3 Results
4 Empirical Findings and Cross-sectional Differences
5 Conclusion
Research Objectives and Core Themes
This paper investigates the impact of IPO lockup expirations on stock market returns within the German equity market, specifically testing for the existence of anomalous abnormal returns and evaluating whether these returns are influenced by firm characteristics or evolving market efficiency. The study further examines if observed negative price reactions can be attributed to specific market microstructure effects or the price pressure hypothesis, comparing the findings to historical U.S. and German market data.
- Analysis of abnormal stock returns surrounding the IPO lockup expiration date.
- Evaluation of market efficiency in the context of known lockup events.
- Investigation of the Price Pressure Hypothesis and Downward-Sloping Demand Curves.
- Comparison of performance between VC/PE-backed and common IPOs.
- Examination of cross-sectional differences based on firm characteristics and time of issuance.
Excerpt from the Book
1 Introduction
When firms offer shares to the public in an initial public offering, most include what is known as a lockup agreement in their IPO prospectuses. This clause prevents individuals that hold company shares before the company goes public from selling their shares on the secondary market for a predetermined period. These existing shareholders include but are not restricted to management teams, and directors of the company as well as strategic partners and large investors such as venture capital and private equity funds. After expiration of the lockup period, the referring individuals are free to sell their existing or buy firm’s shares.
For a large body of academia, IPO lockups and their effect on market efficiency as well as a signalling tool for firm quality have been focus of research for the last 30 years. There are several reasons why lockup agreements exist, from resolving the problem of asymmetric information between insiders and the public, to ultimately protecting the market price. Investors fear the expiration of lockups, since a rapid supply of shares may suddenly become available on the secondary market, which could result in a sharp drop in the share price. The lock-up period is already known to market participants at the time of the IPO, since it is publicly disclosed in the IPO prospectus and by major data providers. Hence, an efficient market should be able to incorporate this information into the price well before the event occurs. On average no price reaction should be noticeable.
Summary of Chapters
1 Introduction: Provides an overview of IPO lockup agreements, their purpose as signaling and protection mechanisms, and outlines the research objective to examine their effects on the German equity market.
1.1 Related Literature: Reviews existing research on IPO lockup expirations in the U.S. and Germany, highlighting findings on abnormal returns and the role of venture capital and private equity backing.
2 Applied IPO Practice and Theory of Lockups: Reviews the IPO process, the legal and practical nature of lockup agreements, and the theoretical underpinnings regarding information asymmetry and market efficiency.
3 IPO Lockup Expiration and Returns: Details the assembly of the dataset consisting of 142 German IPOs and describes the event study methodology, including asset pricing models used to calculate abnormal returns.
3.1 Data and sample design: Explains the consolidation of data from Bloomberg, Thomson Reuters, and FactSet, and the criteria for selecting the sample of 142 German IPOs.
3.2 Methodology: Describes the event window and the application of the general market model, Fama-French 3-factor model, and Carhart 4-factor model to estimate expected returns.
3.3 Results: Presents empirical evidence of abnormal returns around the lockup expiration date and analyzes trading volume patterns.
4 Empirical Findings and Cross-sectional Differences: Investigates how abnormal returns vary across firm characteristics, such as VC/PE-backing, firm size, and time of issuance, while discussing potential explanations like downward-sloping demand curves.
5 Conclusion: Summarizes the key findings, confirming the existence of significant negative abnormal returns around lockup expirations and rejecting the hypothesis that this anomaly has vanished due to increased market efficiency.
Keywords
IPO, Lockup Expiration, Abnormal Returns, Market Efficiency, Venture Capital, Private Equity, Price Pressure, Downward-Sloping Demand Curves, Information Asymmetry, Signaling, German Equity Market, Event Study, Asset Pricing Models, Insider Selling, Underwriting
Frequently Asked Questions
What is the primary focus of this study?
The study focuses on the impact of IPO lockup expirations on stock market returns within Germany, analyzing whether these events trigger anomalous price drops despite being publicly known information.
What is the core research question?
The research asks to what extent lockup expirations reflect anomalous abnormal returns in the German market and whether these returns differ based on firm-specific characteristics and changing market conditions over time.
What methodology is utilized?
The author employs an event study methodology using Fama-French 3-factor and Carhart 4-factor asset pricing models to control for systematic risk and isolate the abnormal returns associated with the lockup expiration date.
What are the central thematic areas?
Central themes include IPO lockup theory, market efficiency, signaling, information asymmetry, the impact of venture capital and private equity on post-IPO performance, and microstructure effects like trading volume and bid-ask spreads.
What is covered in the main body of the paper?
The main body details the data collection process, describes the event study methodology, presents empirical results on abnormal returns and trading volumes, and performs a cross-sectional analysis to determine the influence of firm characteristics on these outcomes.
Which keywords characterize this work?
The key concepts include Initial Public Offerings (IPO), Lockup Expirations, Abnormal Returns, Market Efficiency, Price Pressure Hypothesis, and Private Equity/Venture Capital backing.
Does the study find evidence of abnormal returns for German IPOs?
Yes, the study finds statistically significant negative abnormal returns around the lockup expiration date, indicating that the market does not fully anticipate these events according to the efficient market hypothesis.
How does the author test the Price Pressure Hypothesis?
The author tests this hypothesis by analyzing trading volumes and potential changes in bid-ask spreads, concluding that while there is an increase in trading volume, the negative return cannot be purely attributed to microstructure effects.
Do VC-backed and PE-backed IPOs perform differently?
The study observes that firms backed by venture capital or private equity experience different return patterns compared to common IPOs, though these differences diminish in multivariate tests when controlling for other variables.
- Citation du texte
- Samuel Kemper (Auteur), 2020, Grow or Go? The Expiration of IPO Lockups in Germany, Munich, GRIN Verlag, https://www.grin.com/document/973724
