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CAR associated with SEO share lockups: Real or illusionary?

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Abstract

This paper examines the cumulative abnormal return (CAR) associated with both the expiration and initiation of SEO share lockups. First, we find that the average CAR around the expiration of SEO share lockups is significantly negative, but this result is mainly attributed to inappropriate benchmarking of the CAR. Second, there is also, on average, a significant negative CAR at the initiation of SEO share lockups, but the negative CAR is a temporary phenomenon that reverses itself within a short period of time. Overall, our findings do not support the downward sloping demand curve hypothesis on the lockup expiration effect.

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Notes

  1. Extending the same analysis to a sample of non-VC-backed IPOs, we find that the CARs for the lockup expiration group are, on average, also not significantly different from that of the control group. For VC-backed IPOs, the same benchmarking procedure significantly reduces the negative CARs associated with the lockup expiration group, but does not completely remove their statistical significance.

  2. Our study also differs from Zheng et al.’s (2005) study, which argues that underpricing, share retention, and share lockup are simultaneously determined to maximize aftermarket liquidity.

  3. Rule 144 applies to the re-sale of shares that are issued outside a registered offering. Under Rule 144, the restricted shares can only be sold to the public after a minimum holding period of at least 1 year. Thereafter, the restricted shares can only be sold in small increments and are subject to volume restrictions.

  4. Santarus Incorporated, which was listed on Nasdaq in 2004, also warned investors in its prospectuses that “[upon the expiration of lockup agreement], sales by our current stockholders of a substantial number of shares, or the expectation that such sales may occur, could significantly reduce the market price of our common stock.”

  5. In Field and Hanka (2001), the reported insider sales are within an event window of ±2 weeks. Over a longer event window of ±2 months, Aggarwal et al. (2002) find that 60 % of IPOs do not have insider sales around lockup expiration.

  6. We find that the SDC database wrongly classifies 107 IPO issues as SEO issues. We have accordingly excluded these 107 issues from our SEO sample.

  7. Using insider sale records from Thomson Financial’s Insider Filing (TFIF) database, Karpoff et al. (2012) find that early releases occur in 39.5 % of their sample of SEOs, but their finding is likely to be grossly inaccurate because not all insider sales prior to lockup expiration date are due to early releases. For example, Field and Hanka (2001) find that 28 % of their sample of IPOs had insider sales prior to the lockup expiration date. But after carefully screening out insider sales that are not covered by the lockup, sales due to overallotment option, and sales associated with internal transfers between individual accounts, Field and Hanka (2001) find that only about 6 % of IPOs had insiders sales that are due to early releases of the lockup or follow-on offerings.

  8. Financial News, “IPO lock-up waivers,” June 10, 2013.

  9. Field and Hanka (2001) similarly find that this SDC data item is missing in 19 % of IPO issues. Alternatively, Field and Hanka (2001) suggest using the fraction of shares not sold in the IPO as a proxy for the percentage of locked-up shares. They find that, on average, 95 % of the shares retained by pre-IPO shareholders cannot be sold before the unlock date. In our SEO sample, we find that the actual percentage of locked-up shares is substantially less than the fraction of unsold shares. This is because a large portion of the unsold shares in an SEO are held by the public and these shares are not subjected to lockup. Thus, the fraction of unsold shares is not a good proxy for the percentage of locked-up shares in a SEO.

  10. In comparison to non-VC-backed companies, Liu (2014) finds that the VC-backed companies exhibit significantly less real activities manipulation (earnings management) in the first post-IPO fiscal year.

  11. Overall, 78 % of the SEO issues in our sample have lockup expiration event dates of 90, 120, or 180 days.

  12. Our results are qualitative the same when the lockup expiration group and control group analysis is done separately for each of the lockup expiration events, i.e., when the data are not pooled together.

  13. Although not reported, we find that the SEO lockup expiration group, which accounts for 78 % of the overall SEO sample, is representative of the SEO sample. Statistically, the mean and median CARs for the SEO lockup expiration group are not significantly different from that of the overall SEO sample.

  14. Following Ofek and Richardson (2000), the abnormal trading volume is measured by dividing the average daily volume over the lockup expiration event window by the average daily trading volume from day −50 to day −21 (relative to the lockup expiration event date).

  15. First, the presence of heterogeneous investor opinion can lead to less than perfect demand elasticity and, hence, a downward-sloping demand curve. In Miller’s (1977) model, for example, the downward-sloping demand curve is attributable to the discounting required to induce pessimistic investors to purchase shares. Chen et al. (2002) further show that the diversity of opinion about a firm’s growth prospects leads to a downward demand curve for its stock. In our study, the Analyst Dispersion variable is a proxy for heterogeneous investor beliefs. Second, Wurgler and Zhuravskaya (2002) show that a downward-sloping demand curve can arise when risky arbitrage between imperfect substitutes prevents arbitrageurs from flattening the demand curve. A proxy for risky arbitrage arising from the lack of close substitutes for stocks is the degree of idiosyncratic risk.

  16. We select a 420-day holding period because the lockup lengths are rarely longer than 420 days. Nevertheless, we also obtain similar results using a 1-, 2-, 3-, 4- and 5-year holding period.

  17. Although not reported, we also find that the lockup expiration group’s mean and median CAR for the [−1, +1] and [−20, +20] event windows are not statistically different across the three sample periods.

  18. However, if we apply the same reasoning to the expiration of share lockups, then there should not be any statistical effects associated with the expiration of share lockups, given that these insider shares are tightly held and are not freely traded in the first place.

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Authors and Affiliations

  1. Division of Banking and Finance, Nanyang Business School, Nanyang Technological University, S3-01C-97, Nanyang Avenue, Singapore, 639798, Singapore

    Beng Soon Chong

  2. School of Management and Economics, The Chinese University of Hong Kong, Shenzhen, Shenzhen, China

    Zhenbin Liu

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  1. Beng Soon Chong
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  2. Zhenbin Liu
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Correspondence to Beng Soon Chong.

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Chong, B.S., Liu, Z. CAR associated with SEO share lockups: Real or illusionary?. Rev Quant Finan Acc 47, 513–541 (2016). https://doi.org/10.1007/s11156-015-0510-8

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