IPO lockup expiration, market sentiment and private equity reputation

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Journal Title

Journal ISSN

Volume Title

School of Business | Master's thesis

Authors

Date

2024

Department

Rahoituksen laitos

Major/Subject

Mcode

Degree programme

Finance

Language

en

Pages

53 + 6

Series

Abstract

Initial public offerings often feature a lockup provision – an agreement that restricts company insiders' share sales for a fixed period, typically 180 calendar days after the offering. This provision plays a crucial role in the marketability of the offering, aligning interests between external investors and company insiders. Using a sample of 2428 issuers listed in the United States between 2003 and 2022, this thesis examines the impact of lockup provision expiration, revealing significant negative abnormal returns and increased volume for issuers around the lockup expiration. Furthermore, we analyze the influence of private equity backing on returns around the lockup expiration. Consistent with earlier studies (Field and Hanka 2001; Gibbs and Hao 2018), we observe that venture capital-backed issuers experience more pronounced negative abnormal returns and increased volume around the lockup expiration compared to the overall sample. However, we do not identify a similar trend for other private equity backing groups (growth capital and buyout). Instead, we discover a significant positive abnormal return for buyout-backed issuers. Contributing to the existing literature, we find that issuers backed by reputable private equity funds experience larger losses around the lockup expiration. We suggest that this is not due to share sales by the reputable lead fund but rather results from the actions of non-lead funds and company executives. Additionally, our thesis is the first to study how prevailing market sentiment impacts returns around the lockup expiration. Our findings indicate that elevated market sentiment around the lockup expiration, as measured by high VIX values and peaks in the number of monthly IPOs, negatively impacts returns.

Description

Thesis advisor

Puttonen, Vesa

Keywords

lockup expiration, asymmetric information, market sentiment, VIX, venture capital, growth capital, buyout, private equity fund reputation

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Citation

Permanent link to this item

https://urn.fi/URN:NBN:fi:aalto-202402182443

Collections

[gradu] Kauppakorkeakoulu / BIZ