We examine 1,948 share lockup agreements that prevent insiders from selling their shares in the period immediately after the IPO~typically 180 days!. While lockups are in effect, there is little selling by insiders. When lockups expire, we find a permanent 40 percent increase in average trading volume, and a statistically prominent three-day abnormal return of Ϫ1.5 percent. The abnormal return and volume are much larger when the firm is financed by venture capital, and we find that venture capitalists sell more aggressively than executives and other shareholders. We find limited support for several hypotheses that may explain the abnormal return, but no complete explanation.MOST IPOS FEATURE SHARE LOCKUP AGREEMENTS, which prohibit insiders and other pre-IPO shareholders from selling any of their shares for a specified period. The typical lockup lasts for 180 days, and covers most of the shares that are not sold in the IPO. The terms of the lockup, including the expiration or "unlock" date, are disclosed in the IPO prospectus. Lockups serve several purposes. They reassure the market that key employees will continue to exert themselves for at least a few months; they provide a credible signal that insiders are not attempting to cash out in advance of imminent bad news; and they may aid the underwriters' price support efforts by temporarily constraining the supply of shares. While the lockup is in effect, trading in the IPO firm is distinctly different from trading in established firms. Only a fraction~typically about one-third! of the outstanding shares can trade, and there is little selling by employees, executives, or other pre-IPO shareholders. On the unlock day, insiders are suddenly allowed to sell up to the volume limits of Rule 144, 1 potentially tripling the public f loat and increasing the information asymmetry between traders.

We find that firms protected by "second generation" state antitakeover laws substantially reduce their use of debt, and that unprotected firms do the reverse. This result supports recent models in which the threat of hostile takeover motivates managers to take on debt they would otherwise avoid. An implication is that legal barriers to takeovers may increase corporate slack.

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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.

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