What is the significance of a lock-up period for a company post-IPO?

The significance of a lock-up period for a company following its initial public offering (IPO) primarily lies in its role in stabilizing the stock price. During the lock-up period, typically lasting from 90 to 180 days after the IPO, insiders such as executives and employees are prohibited from selling their shares. This restriction helps to prevent an influx of shares flooding the market immediately after the IPO, which could lead to excessive volatility and a potential drop in stock price.

By limiting the number of shares available for sale, the lock-up period provides time for the market to absorb the stock and allows for a more orderly price discovery process. As insiders are not able to sell their shares, it helps to build investor confidence and can contribute to a more stable and sustainable stock price in the early days of public trading. Once the lock-up period expires, insiders may be allowed to sell their shares, which is typically a time of increased market activity, but by that point, a more established price level is often in place.