Effect of Underpricing and Lock-Up Provisions in IPOs

Abstract

This article examines two issues regarding initial equity public offerings (IPOs) of 775 firms that came to market between July 1, 1997, and December 31, 1999. First, a study of the underpricing of new issues indicates that first–day excess returns are greater for venture–backed IPOs, high–tech firms, and firms underwritten by top–rung investment bankers, and in months following high previous–month Nasdaq returns. Second, the authors look at the longer–run performance of IPOs and the effect of the so–called lock–up provision, which restricts initial founders and owners of the IPO from selling their shares for a period of time. They find a statistically significant increase in trading volume on the day following the unlock date. Prices begin to fall, however, prior to the end of the lock–up period as the market anticipates the selling that is likely to follow. There is a substantial negative excess return for shareholders who buy new issues in the open market immediately after the IPO.