When a company goes public, it usually puts a lock-up agreement into place that prevents insiders from selling their stocks immediately after the IPO (90 – 180 days is typical), giving the price some time to settle and assuring investors that the market won’t be immediately inundated with shares. But as the lock-up expiration approaches the stock price tends to fall, and tech stocks are hit twice as hard as other sectors.

“On average, stocks traded down ahead of and through their IPO lock-up expiration; they rebounded modestly in the following month. Shares were weakest on average from -7 business days to +1b,” write Goldman Sachs analysts Robert D. Boroujerdi and John Marshall, who compared nearly 11,000 IPOs and follow-on offerings going back to 1995. They also found that “follow-on Offering lock-up expirations did not have the same negative return profile in our analysis.”

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Volatility also spikes in the days ahead of lock-up expiration

On average, the stock price dips 2.2% peak-to-trough in the eight days surrounding the end of the IPO lock up, with a sharp uptick immediately after. The usual explanation for this phenomenon is simply that the extra shares potentially coming onto the market depress the stock price, and if there isn’t a big insider sell-off than the price starts to recover shortly after.

But we don’t see the same dip when the lock-up period ends after a subsequent offering, nor do we see the same rise in volatility. Instead of being a simple case of supply and demand, it seems like investors are waiting to see if insiders have the same confidence in the stock price as the market, and price those fears in starting a week before lock-up expiration.

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Tech stocks drop twice as much before lock-up expiration

If you agree that this is a sign of investor concerns that their valuations of new companies may not be quite right (and the lack of a dip from follow on offerings is because investors are more confident in their valuations), it’s telling that tech stocks have a 5% peak-to-trough drawdown over the same period, a little more than half the market as a whole and they don’t recover nearly as well. Along with health care stocks, which have a 3% drawdown, they are almost completely responsible for this phenomenon, another sign that tech stock IPOs are more especially speculative, and that even the bulls tend to second guess their investments.

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