The IPO Lock-Up Period: Implications for Market E ciency And Downward Sloping Demand Curves

After an initial public o ering, most existing shareholders are subject to a lock-up period in which they cannot sell their shares for a prespeci ed time. At the end of the lock-up, there is a permanent and large shift in the supply of shares. The lock-up expiration is a particularly interesting event to study because it is (i) completely known and observable, and (ii) potentially meaningful economically given the existing literature on supply shocks. This paper investigates volume and price patterns around this period, and documents several interesting results. Speci cally, even though the event is totally anticipated, there is a 1% { 3% drop in the stock price, and a 40% increase in volume, when the lock-up ends. Various explanations are considered and rejected, suggesting a new anomalous fact against market e ciency. However, convincing evidence is provided which shows that this ine ciency is not exploitable, i.e., arbitrage is not violated. This aside, the evidence points to a downward sloping demand curve for shares, with the most likely explanation pointing to a permanent, long-run e ect.