The Role of Lockups in Initial Public Offerings

Alon P. Brav · Paul A. Gompers

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Corporate Finance and Governance Financial Markets and Investment Strategies Private Equity and Venture Capital

Abstract

In a sample of 2,794 initial public offerings (IPOs), we test three potential explanations for the existence of IPO lockups: lockups serve as (i) a signal of firm quality, (ii) a commitment device to alleviate moral hazard problems, or (iii) a mechanism for underwriters to extract additional compensation from the issuing firm. Our results support the commitment hypothesis. Insiders of firms that are associated with greater potential for moral hazard lockup their shares for a longer period of time. Insiders of firms that have experienced larger excess returns, are backed by venture capitalists, or go public with high-quality underwriters are more likely to be released from the lockup restrictions.

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 1984Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have 1977INFORMATIONAL ASYMMETRIES, FINANCIAL STRUCTURE, AND FINANCIAL INTERMEDIATION 1977Informational Asymmetries, Financial Structure, and Financial Intermediation 2002A Review of IPO Activity, Pricing, and Allocations 1990Initial Public Offerings and Underwriter Reputation 1991Venture Capitalist Certification in Initial Public Offerings 1986Do Demand Curves for Stocks Slope Down?

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