Abstract/Summary

The study aims to investigate the initial public offering’s (IPO) lock-up provision and its effects on price changes, trading volume and bid-ask spread around the lock-up expiry date. The efficient market hypothesis (EMH) is investigated in relation to the lock-up provision by using the event study methodology and comparison period returns approach (CPRA). The sample comprises 379 IPO companies, issued from January 2001 to December 2011. Both techniques support the semi-strong form of EMH for IPO market and all trading boards, as there is no detection of abnormal returns in price. In addition, total number of existing and new institutional and individual shareholders that bought shares and came in as substantial shareholders is more than the existing institutional and individual shareholders that sold their shares during lock-up expiration, and most of them have a significant cumulative average abnormal returns (CAARs). However, all these significant CAARs did not lead to a significant abnormal returns for all trading boards and IPO market. The results are the same as European findings, but contradict most US studies. On the other hand, the result of the event study methodology and CPRA shows a positive abnormal trading volume at lock-up expiry date for IPO market and buy and sale by institutional and individual shareholders, except for the ACE Market, which is negative. Insider trading activity sends noticeable signals for the investors as the lack of confidence of insiders about the futures' prospects, motivates sales of stocks after the expiration. In addition, high trading volume at and around the lock-up expiration is compatible with shareholders’ selling due to the diversification reasons and wealth recognition. As seen, these increases in trading volume cannot be a strong driver for price change at and around expiration. The event study methodology does not show a significant difference in the abnormal relative spread through the IPO market, different boards and sectors at the expiry date. On the other hand, the average abnormal spread for IPO market, MESDAQ and Main Market during the event window (-7, +7) is significantly different from unity for the event study methodology. However, the results of CPRA methodology for the abnormal spread contradict the event study methodology. CPRA’s result shows a mean daily spread for IPO market and different boards separately. The wider spread associated with the first lock-up expiry is likely to be imposed by market makers who are concerned with trading against the informed insiders. The analysis of buy and sell of substantial shareholders (individual and institutional) during the lock-up expiration shows an increase in average abnormal spread and mean daily spread (MDS) (CPRA methodology) for all categories. This significant increase in abnormal spread of mentioned categories shows information asymmetries between insiders and market makers (outsiders) that can be a strong driver for the significant change in abnormal spread of IPO market. On the other hand, market makers are forced to increase the spread to protect themselves from loss against liquidity or informed traders. The increase in trading costs in the shape of wider bid-ask spread reduces the interest of the stocks. However, bid-ask spread is used as the reward to the market maker for bearing the risk, and as an indicator of the amount of activity in the market. In this case, policy makers must propose strategies to monitor insiders’ activities during the lock-up period.