Information content of lock-up provisions in initial public offerings |
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| Institution: | 1. Pennsylvania State University, School of Graduate Professional Studies, Malvern, PA 19355, United States\n;2. Thammasat University, Department of Finance, Bangkok, Thailand;3. State University of New York (SUNY) at Oswego, Oswego, NY 13126, United States;1. School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 611731, China;2. Odette School of Business, University of Windsor, Windsor, Ontario N9B 3P4, Canada;3. F.C. Manning School of Business Administration, Acadia University, Wolfville, NS B4P 2R6, Canada;4. School of Economics, Peking University, Beijing, China |
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| Abstract: | An overwhelmingly large proportion of initial public offerings (IPOs) report lock-up provisions that prohibit existing stockholders from selling their shares within a specified period after the offering date. These lock-up periods may last as long as 3 years. Because influential buyers request the lock-up, we conjecture that the length conveys credible information pertinent to the risk of the IPO. Analyzing 729 IPOs from January 1990 to December 1992, we found that the lock-up period signals the issuer's riskiness and that a 180-day lock-up period seems to be the norm. Any departure from the norm suggests more uncertainty about a firm's value and thus results in deeper IPO underpricing as well as a larger underwriter spread. We also found that thin-trading activity occurring shortly after the expiration of the lock-up period is perceived by the market as good news, while heavy trading is regarded as bad news. |
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