Insider Trading and the Long-run Performance of IPOs

Previous research has shown that IPOs (Initial Public Offerings) generate zero or negative excess returns in the long run.

This research addresses the question: Do IPOs (Initial Public Offerings) in which insiders (defined here as board members) are net sellers underperform relative to those in which insiders are net buyers? If so, does this difference in performance occur before or after their trades, and does this mean that insiders trade in response to their IPOs' past performance or to signal future stock price performance?

For this research a unique dataset containing all information from prospectuses and insider trading events of 830 UK IPOs was constructed and examined along with relevant acounting and stock price data, three years after the IPO date.

The research found a strong relationship between insider trading and the long-run returns of IPOs. UK IPOs underperform in the long run but those where insiders are net sellers generate positive excess returns relative to size.

In contrast, IPOs where insiders are net buyers and/or are not subject to insider trading have negative returns.

The analysis of individual trades shows that insiders sell when their IPO reaches its optimal value, as excess returns are positive pre-event and are not significant post-event.

Returns are negative for the buy trades in both pre- and post-trade periods, suggesting that insiders buy to support their IPO price, but the post-event returns are not as expected.

This paper contributes to two main areas of research that previously have not been considered conjointly: IPO long-run performance and insider trading.

A draft version of the research paper is available for download at the link below.

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