Pricing Dynamics of Post-IPO Selldowns: How Sponsor-backing Affects the Pricing Performance and Timing of Selldowns

Simon Bech & Aske Taastrøm

Student thesis: Master thesis


This paper examines the effect of financial sponsor-backing on post-IPO accelerated selldowns, an increasingly popular exit strategy. Selldowns are defined as block trades offered by pre-IPO investors that are announced after market close and priced and allocated to institutional investors before opening the next trading day. Using a sample of 1,232 developed-market selldowns taking place between 2000 and 2016, we find that sponsor-backed selldowns have smaller discounts and greater 1-year abnormal returns compared to non-sponsored selldowns, which is in line with previous studies on IPOs. Further, we show that selldowns where pre-IPO sponsors sell their last remaining share (clean-up trade) and eliminate the share overhang have smaller discounts and less negative first-day returns, which we attribute to the market reacting positively to the removal of the overhang. The clean-up effect is shown to explain a large part of the difference in discount between sponsor-backed and non-sponsored selldowns. Additionally, our results suggest that the positive 1-year abnormal performance found in sponsor-backed selldowns decreases significantly after the clean-up trade, which supports the finding that sponsor- backing enhances aftermarket performance. Finally, we find that sponsors do selldowns at a shorter time from expiry of the lock-up provision. We also present evidence suggesting that sponsors put less emphasis on the increase in valuation after the IPO than non-sponsors do when the timing of a selldown is determined. Non-sponsors are more likely to do a selldown shortly after expiry when valuation has increased markedly since the IPO, but we find no evidence that markets react negatively to the signaling value when they do.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2017
Number of pages125