This article aims to shed light on the motivations of insider trading by investigating insider selling behaviors following IPO lock-up expirations.
Using a sample of 1,389 U.S. IPOs from 2002 to 2021, this study first examines the short-term market reaction to insider selling at lock-up expiration. We also test the relationship between insider selling and long-run performance to assess the predominant drivers of insider selling decision at lock-up expiration.
This study finds that the market initially reacts negatively to insider sales in the short-term, confirming the traditional view that such transactions are widely perceived as informative. However, IPO firms with post-lock-up insider sales tend to outperform those without such sales in the long term. We also find that insiders are more likely to sell previously restricted shares after observing substantial initial underpricing and strong pre-expiration abnormal returns.
These findings challenge the conventional view that insider sales are primarily driven by private information or liquidity needs, aligning more closely with the predictions of the disposition effect.
