Non-Marketability and One-Day Selling Lockup

Abstract

We extend previous studies on the effect of non-marketability on stock prices, and examine a very unique short-lived repeating non-marketability that lasts for only less than one day in China. Using the equity call warrants that are not subject to this trading constraint as a control, we provide evidence that such a one-day trading lockup prices a stock at a discount to the stock value implied from the warrants. We further show that the discount decreases throughout the trading day and that investors tend to purchase more stocks when the one-day trading lockup becomes less binding toward the market close. The findings suggest that, in line with the liquidity-based asset pricing theories, one channel through which the non-marketability constraint causes the price discount is that the restriction on asset liquidity or marketability may adversely affect investor demand, thus lowering the equilibrium price.