Behavior of stock prices due to the lock-up period expiration in IPOs and follow-ons

Abstract

The objective of this study was to verify the effects of the lock-up expiration on the behavior of prices and volumes in IPOs and follow-ons in the Brazilian market and to identify factors that may explain the existence and magnitude of abnormal returns. Few studies were found to investigate this phenomenon in Brazil, which were limited to the analysis of IPOs without examining the effect on follow-ons and the construction of abnormal accumulated returns compared to the Ibovespa, instead of benchmarks appropriate to each stock’s risk. Lock-up clauses exist to mitigate the problem of information asymmetry in public offers but expose investors to the risk of a price drop after its expiration. Understanding the magnitude of this impact is essential for investors in the stock market. Through this article’s analysis, investors will be able to estimate the magnitude of the price variation around the lock-up expiration, what factors explain the returns, and whether there are indications of short selling limitations. The event study method was applied, comparing returns to the Ibovespa and an individual reference portfolio composed of similar companies. Database: 313 offers that occurred on the Brazilian stock market between 2004 and 2019. Evidence of volume increase was found around the expiry of lock-up in IPOs, but the price drop was verified only in companies with private equity funds as shareholders. In follow-ons, in which the asymmetry of information about the issuer is less pronounced, the opposite situation was verified. There are several extensions and lock-up formats worldwide, which provide different impacts on volume and price. This article contributes to the literature when analyzing this event in Brazil and extending the analysis to follow-ons. A possible interpretation for the phenomenon is the restrictions on shortselling in the Brazilian market.