Lockups Revisited

• Published in: Journal of financial and quantitative analysis Vol. 40; no. 3; pp. 519 - 530
• Main Authors: Brau, James C., Lambson, Val E., McQueen, Grant
• Format: Journal Article
• Language: English
• Published: New York, USA Cambridge University Press 01-09-2005; University of Washington School of Business Administration, University of Utah David Eccles School of Business, and New York University Leonard N. Stern School of Business
• Subjects: Business structures; Capital formation; Coefficients; Data analysis; Dividends; Empirical evidence; Empirical research; Financial analysis; Financial models; Financial research; Idiosyncratic risk; Information asymmetry; Initial public offerings; Insider dealing; Investment banking; Modeling; Money; Moral dilemmas; Moral hazard; Quantitative analysis; Stock exchange
• ISSN: 0022-1090; 1756-6916
• DOI: 10.1017/S002210900000185X

Lockups are agreements made by insiders of stock-issuing firms to abstain from selling shares for a specified period of time after the issue. Brav and Gompers (2003) suggest that lockups are a bonding solution to a moral hazard problem and not a signaling solution to an adverse selection problem. We challenge this conclusion theoretically and empirically. In our model, insiders of good firms signal by putting and keeping (locking up) their money where their mouths are. Our model yields two comparative statics: lockups should be shorter when a firm is i) more transparent and/or ii) more risky. Using a sample of 4,013 initial public offerings and 3,279 seasoned equity offerings between 1988 and 1999, we find empirical support for our theoretical predictions.