Moderating Effect of Information Asymmetry on the Signalling Role of IPO Lockup Provision

Abstract

This paper examines the moderating effect of information asymmetry on the relationship between parameters of lockup provision and flipping activity of Malaysian IPOs. While the main purpose of lockup provision is to promote commitment of major shareholders for the well-being of the IPO issuing companies at least throughout the lockup period, its importance extends as a signaling device that can convey certain information to the investors about the issuers particularly in regard to their quality or risk. In discussing the issue of signaling, some researchers argue that the significance of a signaling mechanism is determined to some extent by the level of information asymmetry that the firms are facing. This issue is prevalent in the context of IPOs because informations on the issuing firms are normally very limited that the evaluation of the firms’ true value becomes difficult. This study postulates that the lockup provision has a greater influence on flipping activity in higher than lower information asymmetry companies. Using 370 Malaysian IPOs covering the period from January 2000 to December 2012, the results of the multiple regression analyses show that both lockup ratio and lockup period have significantly negative impacts on flipping activities. Since lockup period is uniformly longer (1 year) prior to the 2008 Equity Guidelines revision, the results imply that investors have a greater tendency to flip during the post-2008 revision period when major shareholders are perceived to be less strongly accounted for their firms’ performance. The results also show that information asymmetry moderates the negative relationship between lockup provision and flipping activity, specifically, in regards to lockup period.

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