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Does Insider Trading Impair Market Liquidity? Evidence from IPO Lockup Expirations

Published online by Cambridge University Press:  06 April 2009

Charles Cao ,
Laura Casares Field  and
Gordon Hanka
Charles Cao
Affiliation:
charles@loki.smeal.psu.edu, Department of Finance, Smeal College of Business, Penn State University, 609 BAB 1, University Park, PA 16802 and CCFR;
Laura Casares Field
Affiliation:
lcf4@psu.edu, Department of Finance, Smeal College of Business, Penn State University, 609 BAB 1, University Park, PA 16802;
Gordon Hanka
Affiliation:
gordon.hanka@owen.vanderbilt.edu, Owen Graduate School of Business, Vanderbilt University, 401 21st Avenue South, Nashville, TN 37203.
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Abstract

We test the hypothesis that insider trading impairs market liquidity by analyzing intraday trades and quotes around 1,497 IPO lockup expirations in the period 1995–1999. We find that, while lockup expirations are associated with considerable insider trading for some IPO firms, they have little effect on effective spreads. By contrast, two other liquidity measures, quote depth and trading activity, improve substantially. In the 23% of lockup expirations where insiders disclose share sales, spreads actually decline. These findings indicate that a large body of well-informed, blockholding insider traders can enter a market from which they had previously been absent, and substantially change trading volume and share price without impairing market liquidity.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 39 , Issue 1 , March 2004 , pp. 25 - 46
Copyright
Copyright © School of Business Administration, University of Washington 2004

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