The Role of Lockups in Venture Capital Backed IPOs : An empirical study on the London Stock Exchange from 2009 to 2012

Abstract: There are plenty of things said about the financial industry, an always ongoing debate, to say the least. We have identified a complex situation with three dimensions: Initial public offerings, Venture capital, and Lockup agreements. IPOs are generally difficult to put a price on because the market is not united yet, which creates uncertainties. Venture capital firms invest into startups, often with the incentive of bringing them to an IPO and then make a fast cash out exit. Lockup agreements are contracts that prevent insiders from dumping their shares during a set period in the beginning of the IPO. Additionally, based on the market efficiency theory, a market should always be efficient. But does it play out when these characteristics are affecting each other? The purpose of this research was to investigate whether there are abnormal returns in the financial performance for publicly listed companies on the London Stock Exchange at the end of their lockup period. We sorted on venture capital backed companies and sought to explore differences between VC backed, Non-VC backed firms, and the entire market. The research question for this study is: ‘Does The theoretical aspects of this research’s ontological and epistemological views were set in positivism and objectivism with a deductive approach. The financial performance was key in this research, and it was essential to get ample and appropriate data, therefore a quantitative research method was used with an archival research strategy and explanatory research design. We explored a big research gap in this area after the financial crisis 2008, which made us look at IPOs from 2009 to 2012 with an event window as our time horizon. To answer the research question and fulfill our purpose, four hypotheses were developed with focus on VC backed firms, Non-VC backed firms, the entire market, and one shorter event window. Our results prove that the market efficiency theory does not hold. To answer the research question, we found negative abnormal returns after the lockup expiration date for both Non- VC backed firms and the entire market. However, we were unable to provide a statistically significant result for VC backed firms. There was an extra clear trend during the middle 20 days, and we suggest and encourage to further research with a longer time horizon than [- 20, +20] days.