Abnormalities Surrounding Nordic IPO Lock-up Expiration: An Event Study and Cross-sectional Analysis

Abstract

The IPO lock-up agreement is a bonding tool that prevents pre-IPO shareholders from selling their shares for a specified duration following the IPO. We study 657 lock-up agreements from 326 IPOs in the Nordics that expire between 2012 and 2021. Conducting an event study, we detect a significant negative abnormal return of up to 1.61% surrounding the lock-up. This coincides with a significant increase in abnormal volume. Furthermore, we find that abnormal negative returns are more prevalent for shareholder lock-ups compared to lockups applying to management. Furthermore, we observe significantly lower abnormal returns for lock-ups with shareholders that do not offer secondary shares in the IPO, and firms with superior stock price performance, and a higher proportion of shares locked up. Following our results, we encourage firms to move away from the standardisation trend observed with regard to setting lock-up characteristics. This will send powerful information signals to outside investors, mitigating information asymmetry. Finally, we believe that trading opportunities resulting from abnormal returns are non-exploitable for short investors because of associated costs and potential short-selling constraints.