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