Introduction to the Updated Report
We first published our findings on above market returns at the IPO quiet period expiration in August 2014. (For an explanation of the quiet period expiration's meaning, please see the 'background' section below.)
Then, the holding period with the best combination of performance and statistical significance was the window of (-5, +2) days. The notation uses the quiet period expiration as day 0, with days before as negative numbers and days after as positive numbers (start of period, end of period).
The initial sample included 118 companies, which had gone public in 2014.
Now, at the end of 2014, our sample includes 258 companies, and the new data has necessitated a slight shift in our conclusions.
Along with our research on IPO lockup expirations, we have appreciated the intelligent feedback from many Seeking Alpha readers and hope this report continues to spur discussion.
Quiet Period Report Update - December 29th, 2014
· Performance has increased for some groups and decreased for others. Previously, the time period with the highest returns was (-5, +2); now it is (-11, 0).
o Most notable among the groups that have decreased is the (-5, +2) group for the sample that excluded REITs and banks. This was noted as the most promising group in the original report. Prior to the update, it had returns of 2.7% and a p-value of .056620. Now, it has returns of 1.7% and a p-value of .042767, meaning lower returns yet higher statistical significance.
§ It was noted in the original report that the group that also excluded stocks that increased by more than 35% from pricing to day -6 had higher returns of 3.0% but a less significant p-value of .061885, so choosing to exclude such stocks could be considered.
§ After the update, however, the group excluding 35% gainers had better performance of 2.0%, and a lower p-value, .025768, than the group that only excluded REITs and banks. This is the second lowest p-value of any of the updated groups.
o Most notable among the groups that have improved is (-11, 0) for the sample that excludes REITs and banks. Prior to the update, it had returns of 2.4%, but a statistically insignificant p-value. After the update, it still has returns of 2.4%, but it now has a statistically significant p-value of .035653. At 2.4%, its returns are the highest of any of the updated groups.
· More results have statistical significance after the update.
o This is relevant, because it indicates that increasing the number of observations has generally increased the significance of the underlying anomaly, forming the theoretical basis for a quiet period trading strategy, namely, abnormal returns around the expiration of the quiet period.
Conclusion: Two Options For Interested Investors
The two most promising options for trading strategies are:
1. (-11, 0) excluding REITs and banks.
a. Higher returns than option 2 yet higher p-value.
b. Longer holding period than option 2.
2. (-5, +2) excluding REITs, banks, and greater than 35% gainers from pricing to day -6.
a. Lower returns than option 1 yet lower p-value.
b. Shorter holding period than option 1.
Charts comparing updated and pre-update results for the full sample and two subsets of the full sample are included on the following two pages.
Additional Background Information
The IPO quiet period is a unique event, which our firm has studied closely for the past three years. Depending on a company's revenues, its IPO underwriters are not allowed to release research reports for 25 days (if revenues are under $1 billion) or 40 days (if revenues are over $1 billion) from the date of the IPO. Counting is tricky: Day (1) is the first trading day after the IPO, and the first window for the publication of research reports opens after-market on Day (25) or Day (40).
These reports are, more often than not, positive. (Underwriters have a strong incentive to boost a company they recently underwrote.) Widely distributed, the first round of reports usually causes a temporary increase in the company's share price.
What's more, savvy investors, having studied the quiet period expiration, often buy shares of a company approaching this point in anticipation of the price increase described above. Thus, a company's share price often rises several days preceding the event.
The pattern is noticeable with Facebook (NASDAQ:FB)'s quiet period expiration on June 27, 2012 - 40 days after its May 18, 2012 IPO. An increase in share price is visible in the (-5, +2) day window surrounding the quiet period expiration.
Other factors, such as the number and reputation of a company's underwriters, the industry to which it belongs (REITs, biotechs, financial institutions, etc.), and market conditions have also been noted to impact the share price around the time of the quiet period expiration.
Alex Bird researches IPO trading strategies exclusively for DRD Investments. He previously analyzed Exchange Traded Funds (ETFs) for Dion Money Management (now Atlas Wealth Management). Mr. Bird holds a B.A. in Economics and has passed Level II of the CFA program.
The conclusions drawn in this report are based on past results and do not guarantee future performance. Investors should always do their own research.
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.