Our analysis of post-lockup stock price data shows that, on average, one of the worst days to sell is on the day immediately following the lockup expiration.
We found that companies that had IPOs saw their stock prices decline, on average, by more than 1% that day, following an average 10% decline over the preceding three months. On average, IPO stocks recover from the trough of that day in the next day or two, and some – as highlighted in this related post – sustain their rebounds over time.
Because many employees emerge from an IPO with a significant amount of their wealth tied up in their company’s stock, they are in a position of having to determine how to diversify their portfolios after the lockup — the time period immediately after an IPO during which insiders cannot sell. We previously released a stock sale simulator to help our clients understand different approaches to selling.
Of course, not all stock prices rebound even immediately after that post-lockup trough. The bottom quintile of stock-price performers in the 20 days before and after the lockup doesn’t ever rebound during that time period. On average, however, most stocks hit a trough on the first day — and if you can avoid selling at the trough, do so.
Here’s how we reached this conclusion: We calculated the one-day return and one-day volume growth on the first day of lockup expiration for each of the 254 tech IPOs from 2000-2011. We also took the average across all the IPOs. As a reference point, we calculated the one-day return of the S&P 500® on the same days, and took the average.
As the following graph shows, the S&P 500 is essentially flat, whereas the IPOs’ return is -1.15%. In the meanwhile, the IPOs’ trading volume rose by 178% on average, i.e., almost tripling the trading volume compared with that of the lockup period.
It’s hard to say exactly what is behind the post-lockup trough. In some cases, where a company’s stock price has declined over the previous three months, employee-insiders may be dumping their shares. In other cases, employees may simply have decided to escape the concentrated risk of having a portfolio that consists mainly of their company’s stock as soon as they can.
In either case, however, the lesson is clear. On average, it is smart not to panic and sell your shares as soon as possible.
Graphics by Jared Jacobs.
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