Influence of Lockup Provision on Flipping Activity of Malaysian IPOs

This paper attempts to investigate the influence of lockup provision and some control variables on the flipping activity of Malaysian IPO. Measured as the percentage of trading volume on the first trading day divided by the number of shares offered, flipping is the easiest way to make a quick profit from IPOs in the initial aftermarket. Consequently, flipping activity has a great potential to create an artificial pressure on the price of IPOs. One way to reduce such an adverse effect is by reducing the supply of IPOs that are available for flipping. This could be the motivation behind the Security Commission of Malaysia decision to impose a compulsory lockup provision on promoters of the issuing companies which restrict them from making an immediate sale of IPOs for a certain length of time. Employing 280 IPOs listed on Bursa Malaysia during the period from 2000 to 2010, this paper documents a significant positive relationship between flipping activity and the lockup ratio, suggesting that the lockup provision does not work in reducing the flipping activities. Of the control variables included in this study, initial return and issue size significantly influence flipping activities. In general, the results suggest that flipping activity can be effectively controlled by creating pools of IPOs large enough to meet demand and reducing the level of underpricing