Trading by Directors Around the Expiry of Lock-In Agreements in UK Ipos
37 Pages Posted: 22 Mar 2002
Date Written: February 2002
Most UK IPOs include lock-in agreements, which prevent the directors and other initial shareholders from selling their shares for a specified period after the IPO. Using a sample of 94 UK IPOs, we analyse their stock performance around the time of expiry of the lock-in agreement. We also look at the volume and pattern of directors' sales before and after the expiry of the lock-in agreement. We find that the average cumulative abnormal return around the lock-in expiry is negative and is significantly different from zero. However, examining stock performance around the lock-in expiry in the UK is not straightforward, as the expiry dates of two thirds of lock-in agreements are tied in with the announcement or publication of financial figures. This makes it difficult to estimate the expiry date. Also, the abnormal returns around the expiry may be influenced by the information effect of the earnings. We also examine the announcement effect of directors' sales on the stock performance. There is a substantial increase in share sales by the directors in the weeks immediately after the lock-in expiry. Surprisingly, the sub-sample of the companies that report directors' sales around the expiry date have positive average cumulative abnormal returns, albeit not statistically significant, whereas the sub-sample of companies without sales have negative returns. Finally, we investigate the likelihood of directors' sales occurring around the expiry of the lock-in agreement. We find that companies with a good stock performance before the expiry are more likely to have directors' sales. Overall, our results suggest that the directors' sales are not related to IPO signalling whereby firms would signal their quality using the duration of the lock-in agreement, the percentage of the shares locked-in and the level of IPO underpricing.
Keywords: initial public offerings, lock-in, lock-up
JEL Classification: G24, G34
Suggested Citation: Suggested Citation