In a paper titled, "IPO Lockup Expirations: A Persistent Anomaly of Scale," author Kevin Green reviews the decline in stock prices following the expiration of lockup agreements relating to initial public offerings. Green reviewed all IPOs from 1988 to 2014 and then observed the trading activity around the lockup expiration. Despite the availability of information to market participants regarding the timing of IPO lockup expirations, trading activity around the time of lockup expirations still is anomalous. Trading activity significantly increases following lockup expiration. The stock price for non-VC backed IPOs declines modestly leading up the the lockup expiration compared to VC-backed IPOs, and rebounds in a five-day window following lockup expiration. However, for VC-backed IPOs, there was a substantial decline in the period immediately prior to the lockup expiration. Short selling activity spikes immediately prior to lockup expirations (which demonstrates, among other things, borrow availability) and then falls below average pre-lockup expiration levels. Short sellers do not appear to be able to predict correctly which VC-backed IPOs will decline post-IPO expiration. Green concludes that market inefficiencies play a role but the abnormal returns are sensitive to the size of the capital investment. Limits on the capital deployed or on the scalability of the investment may explain why the abnormal return patterns persist.
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