Research On Information Discovery And Investor Behaviors In Lockup Periods

We document a prominent abnormal stock return of -14% during the [-120, +20] day window around 482 lockup expirations in the Split-share Structure Reform in China, which occurs primarily during the period [-120,-40].We hypothesize the significant abnormal stock returns are driven by an information discovery process that alleviates the information asymmetry between tradable and non-tradable shareholders. The hypothesis suggests tradable shareholders use lockups to assess the quality of the firm and to evaluate non-tradable shareholders'commitments to alleviate agency problems by watching the behaviors of the firm– the are more likely to quit the firm before lockup expiration to avoid future exploitation if information flows remain limited or there lacks of indications for corporate performance improvement during the lockup periods.Results on abnormal returns support the information discovery hypothesis. Utilizing a self-selection model, we show abnormal returns are significantly and negatively correlated to ex ante information asymmetry and agency problems of the firm, and positively correlated to performance improvements, after controlling for the effects of downward sloping demand curves and speculation bubbles. An analysis of the post-lockup transactions of non-tradable shareholders adds further support to our hypothesis– non-tradable shareholders of less transparent firms sell their shares more aggressively.Evidences on the trading behaviors of tradable shareholder during the lockup periods provide further supports for the hypothesis. Employing a dataset of intraday transactions of the sample stocks we manage to calculate the net buying indicator to measure the magnitudes of tradable shareholders'selling volume during the lockup period. The indicator is negatively correlated to information asymmetry and agency problems of the stocks, implying tradable shareholders are more willing to liquidate their positions of less transparent stocks with more serious agency conflicts in the lockup period. We compare the information discovery abilities of various categories of investors in the lockup period. Evidences show institutional (large) investors lead the process of information discovery, while individual (small) investors are unable to discover information in a timely manner. Among the 11 types of institutional investors, mutual funds demonstrate the strongest information discovery capacity.