| Initiate Public Offering in China market usually contain "lock up" agreement in order to block insiders to trade in the market thus disadvantaging other market participants. Generally speaking, there are two types of IPO lock up agreements in China. One is the original shareholder lockup agreement and another is institutional investor lockup. According to Corporation law and Security Law in China, shares attained before the company goes public cannot be traded within 12 months following the IPO. But if the shareholder is one of the major controllers of the company, the lockup period will be extended to 36 month. Regarding the institutional investors who acquires share in IPO, the lockup period is usually three months following the IPO. Since the insiders have information advantage and insider’s sell plays a critical role in the market, if the insiders sell the shares, it may signify the price is overvalued in the market and the market will reevaluate the stock downward thus pushing the price back to intrinsic value. The expiration of IPO lock-up is the first opportunity for the insiders to sell their shares, so it may has a great impact on the market.Theoretically, the market impact of expiration of IPO lockup is related to efficient market hypothesis and the downward sloping demand curve hypothesis. If the market is efficient, CAR around IPO unlock should not be significantly different from zero. And if the demand curve for stock is downward sloping, the rise of stock supply in the IPO unlock will drive down the price. This can help to explain why CAR around IPO lockup is usually negative. Relative research suggested that China stock market efficiency has gradually improved and basically had reached the weak form market efficiency. The relative research in US shown the cumulative abnormal return is significant negative and trade volume increases significantly around the days of expiration of the IPO lock up, and when there are venture capitalist, the CAR is more negative. These researches also suggest the price drop is inconsistent with rational expectation and efficient market hypothesis. Some of these researches argue the market impact of IPO lockup expiration is consistent with the downward sloping demand curve hypothesis. Relative researches in China are more focused on unlock of non-tradable share’s market impact, and there are few research on IPO unlock. Most of these researches give similar conclusions as the research in US, the CAR around the unlock day is negative. But some others suggested an opposite result, that CAR is positive or around zero by using different samples. Some of these researches also point out the CAR is related to PB ratio, percentage of unlock, whether the company is State-owned companies, turnover exchange ratio, and EPS, ROE, etc.In this research I examine the CAR and trade volume around the lock up expiration for a sample of 399 unlock events, with a 251 original shareholder unlock and 148 institutional investor unlock, from 2008 to May 2010.The main aim of this event study is to find out how the market response to the expiration of IPO lockup. It is done by calculated the CAR(cumulative abnormal return) and abnormal volume around the unlock day.The abnormal return is measured by actual daily return relative the return estimated by the market model. Estimated return in day T=β0+β1(Rmt)Abnormal Return in day T= actualreturnt-estimatedreturnt CAR(-A, B)=(?) (Abnormalreturni) After CAR and Abnormal volume are attained for every stock, they are used to conduct linear regression against the unlock percentage and the company fundamentals(ROA, ROE, PE ratio, PB ratio, D/A ratio, D/E ratio, Financial leverage, P/EBITDA) on the previous year of the unlock events. Also, CAR and abnormal volume are compared among different groups (by type of investors, company market capital, etc.)The resulted suggested that the expiration of IPO generally leaded to significant abnormal return and significant trade around the expiration day. CAR[-10,10] of Original shareholder is -2.7%, CAR[-10,10] of Institutional investors is -1.5%, CAR[-1,1] of Original shareholder is 0.16%, and CAR[-1,1] of Institutional investors is -2.16%. Also the abnormal volume increase significantly around the unlock day. The trade volume on unlock day is 44.6% higher than per-event level for original shareholder unlock and 226% higher for institutional investors. After the expiration of IPO lockup, trade volume is 20% to 30% higher than the mean of pre-event level at the end of the time window.The CAR[-10,10] of original shareholder, CAR[-1,1] of institutional investors, CAR[-0,0] of institutional investors, and CAR[-0,0] of original shareholder are significantly different from zero, indicating the market is not efficient, because the unlock day and unlock percentage are known by the market in advanced.The cumulative abnormal return and abnormal trade volume are different for original shareholder and the institutional investors. The CAR of original shareholder lockup decrease earlier and more smoothly than the CAR of institutional investor lockup. The CAR[-1,1] is positive for original shareholder but negative for of institutional investors, and the difference is significant. In addition the CAR of original shareholder unlock is lower at the end of the time window of the event.Furthermore, the CAR tend to be lower when the unlock percentage is larger. CAR also negatively related to the market cap of the unlock company. Regarding unlock of original shareholder, CAR[0,10] is lower when abnormal volume is higher. But for the unlock of institutional investors, CAR [0,10] is higher when abnormal volume is higher. The downward sloping demand curve hypothesis is only partially supported.We found no company fundamental factor shows a significant impact on the CAR.The abnormal volume of original shareholder lockup increased earlier and more smoothly than abnormal volume of the institutional investor lockup, the latter is more volatile as it surge to over 200% on unlock day but soon drop back. Together with the significantly lower return on the unlock day, this may indicated that the institutional investors sell more on the unlock day thus crashing price down. The abnormal volume of original shareholder lockup is positively correlated to the Debt to asset ratio.In general, the market impact of the IPO unlock is similar to of the unlock of non-tradable share, the cumulative abnormal return is negative around the unlock and trade volume increase after the unlock. In addition, the market impact of original shareholder unlock is more similar to the unlock of non-tradable share in terms of the CAR and abnormal volume around the unlock day. While the CAR and abnormal volume of institutional unlock are more volatile than the non-tradable share unlock. Also, unlock percentage has a negative impact on CAR for both IPO unlock and non-tradable share unlock.But unlike the non-tradable share unlock, no company fundamental factor has a significant impact on CAR. Also, the size of the unlock company has a different effect on the CAR for these two type of unlock.BackgroundInitiate Public Offering in China market usually contain "lock up" agreement in order to block insider to trade in the market thus disadvantaging other market participants. The lockup provision is required by law but the company’s shareholders may promise to hold their share longer than the required lockup period. Generally speaking, there are two types of lock up agreements. One is the original shareholder lockup agreement and another is institutional investor lockup. According to Corporation law and Security Law in China, the share attained before the company goes public cannot be traded within 12 months following the IPO. But if the shareholder is one of the major controllers of the company, the lockup period will extend to 36 month. As to the institutional investors who acquire share in IPO, the lockup period is usually three months following the IPO.Theoretically, since the insiders have information advantage and insider’s sale plays a critical role in the market. If the insiders are selling the share, it may signify the price is overvalued in the market and the market will reevaluate the stock value downward thus pushing the price back to intrinsic value. And the expiration of IPO lock-up is the first opportunity for the insider to sell their shares, so it may has a great impact on the market. Also the proportion of share insiders own are large compared to the part held by the public, the suddenly surge of stock supply in the market and may drive the price down according to the downward sloping demand curves hypothesis. Practically, the expiration of the public is generally viewed by the market as a negative impact on price. |
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