Updated Research: Abnormal Negative Returns Around IPO Lockup Expiration - Shorting Opportunity

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Includes: TWTR, XLK
by: Don Dion
Summary

IPO lockup expirations can offer company insiders (executives, directors, officers, PE/VC firms) a first chance to sell their shares. This often impacts at least a temporary decline in stock performance.

Our latest findings show an increase in the greatest negative returns to (-5.8%) in the period of days (-11, 9) days surrounding the event day (0).

The greatest negative returns occur for tech stocks that did not have a secondary and increased in price from their IPO pricing.

Our initial sample included 241 companies whose IPO lockup expirations fell in 2013-June 2014. Our updated sample now includes 345 companies.

Introduction to the Updated Report

When we first published our findings on IPO lockup expirations in August 2014, we received considerable positive feedback from Seeking Alpha readers and followers. We have greatly appreciated the keen interest and wish to continue the discussion by highlighting our updated findings below.

The IPO lockup expiration is a unique event, which our firm has studied closely for the past three years. Following a firm's IPO, insiders - including executives and directors, their families and friends, and venture capital firms - are not allowed to sell their holdings for an agreed upon period of time, which is usually 180 days. This can be seen as a way to maintain a more fair and stable market for the new offering.

In the interest of raising capital, pursuing more consistent and/or lucrative investments, cashing out for personal reasons, or simply letting go in the event of poor performance, on Day (+180) following the IPO, insiders may sell some or all of their holdings. This often affects a temporary decline in the price of the firm's stock.

While our August report's sample included 241 companies, whose IPO lockup expirations fell in 2013-June 2014, our updated sample now includes 345 companies.

What we found was not only a confirmation of the trend between IPO lockup expirations and price declines, but for the sample with the most negative returns (tech stocks that did not have a secondary and increased from IPO pricing), we saw abnormal negative returns move from -5.5% to -5.8%. Several more samples within the expanded batch of 345 companies are also included in the final section.

Updated Findings As Of December 2014

Abnormal returns for the days around the lockup expiration are calculated with the Nasdaq as the benchmark. The day of expiration is denoted as Day 0, while days prior are denoted as negative numbers, and days after as positive numbers. In addition to the overall sample of 345 stocks, several sub-samples were also analyzed.

Below are the top ten sample/return period combinations from the original August lockup report and those combinations after the December update, which includes IPOs that have occurred since the original report in August. We believe the most notable change is:

The sample with the most negative returns, tech stocks that did not have a secondary and enjoyed positive performance from pricing to day -11, saw returns in the period (-11, 9) move from -5.5% to -5.8%, while the number of stocks in the average increased from 51 to 73.

This is important, because as more stocks were added to the sample for the updated version, this average did not moderate toward 0, but instead became more negative, increasing the significance of the finding - whereas in the case of the overall sample, the number of stocks in the study increased from 241 to 345 while results for the same time period, (-11, 9), moved from -3.0% to -2.9%.

After Update

Return Period

Sample Name

Returns

P-Value

N

(-11,9)

Tech, no secondary, positive from pricing to -11

-5.8%

0.0049132

73

(-11,9)

Tech, no secondary

-3.6%

0.0445224

119

(-11,0)

Tech, no secondary, positive from pricing to -11

-4.7%

0.003586

73

(-11,2)

Tech, no secondary, positive from pricing to -11

-5.1%

0.001832

73

(-5,9)

Tech, no secondary

-2.2%

0.1443316

119

(-11,9)

Overall sample

-2.9%

0.0004422

345

(-11,9)

No secondary

-2.5%

0.004854

284

(-11,2)

Overall sample

-1.7%

0.0146508

345

(-11,0)

Overall sample

-1.8%

0.0059823

345

(-5,9)

Overall sample

-1.8%

0.0088417

345

Before Update

Return Period

Sample Name

Returns

P-Value

N

(-11,9)

Tech, no secondary, positive from pricing to -11

-5.5%

0.0099086

51

(-11,9)

Tech, no secondary

-5.2%

0.0262282

75

(-11,0)

Tech, no secondary, positive from pricing to -11

-4.7%

0.0067462

51

(-11,2)

Tech, no secondary, positive from pricing to -11

-4.4%

0.0110211

51

(-5,9)

Tech, no secondary

-3.9%

0.0403203

75

(-11,9)

Overall sample

-3.0%

1.953E-07

241

(-11,9)

No secondary

-2.5%

0.0195112

196

(-11,2)

Overall sample

-2.1%

1.713E-05

241

(-11,0)

Overall sample

-2.1%

0.0003088

241

(-5,9)

Overall sample

-2.0%

1.161E-06

241

Definitions

Return period: the notation uses the lockup expiration as day 0, with days before as negative numbers and days after as positive numbers; (start of period, end of period).

Sample name: describes the types of stocks included or excluded from the sample.

Returns: the average market adjusted returns where the Nasdaq is the market benchmark.

P-value: a number lower than 0.05 indicates statistical significance.

N: the number of stocks in the sample average.

Background

Savvy investors will anticipate this price decrease and often sell their shares in anticipation of the drop. Thus, a company's share price often declines several days preceding the lockup expiration and can last for days afterward.

The pattern is noticeable with Twitter (NYSE:TWTR). TWTR's lockup expiration occurred on May 6, 2014, 180 days after its November 6, 2013, IPO. A decrease in share price is visible in the days preceding and following the event, along with significantly greater volume.

(Nasdaq.com)

If a secondary occurs prior to the lockup expiration, this can increase the number of available shares, rendering the decline from the lockup expiration less intense. At times, a company will try to report positive earnings prior to the lockup expiration, deterring insiders from selling their shares. In this case, the price decline is also often less sharp.

Other factors, such as the existence or strength of a firm's venture capitalists, if it can be categorized as high-tech, and the firm's market performance in the weeks leading up to the lockup expiration have all been noted to impact the share price around the time of the event.

Analyst Alex Bird researches IPO trading strategies exclusively for DRD Investments and has recently re-visited his initial findings on the IPO lockup expiration opportunity. His original conclusions are included below - and latest data set is detailed in the conclusion.

Mr. Bird previously analyzed Exchange Traded Funds (ETFs) for Dion Money Management (now Atlas Wealth Management). He holds a B.A. in Economics, has passed Level II of the CFA program, and holds a Series 65 certificate.

The conclusions drawn in this report are based on past results, and do not guarantee future performance. Investors should always do their own research.

For the full initial report, click here.

We invite readers wishing to join the discussion on IPOs and their lockup expirations to click the +FOLLOW button above the title of this article and those looking for the latest updates to click +Get real time alerts.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.