Overhang

Glossary

Banking

Overhang

In the context of IPOs or rights issues, existing investors will often agree to a lock-up, which is a period during which they agree not to sell shares. When the end of the lock-up is nearing, it creates what is known as an overhang, which is a signal that additional sales could ensue, especially if the price has risen in the meantime. Alternatively, the end of restrictions on shares owned by insiders also creates an overhang; as does the position held by private equity in a company that has gone public and is likely to be subject to subsequent divestments. Equity stakes in banks acquired by governments as a bailout tool during the global financial crisis also represent an overhang, as the ultimate intention is for the government to exit. Exercise of stock options is another example of an overhang.

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