A plethora of useful information ...
LIBRARY OF USEFUL BUSINESS ARTICLES AND LINKS
Abstracted from: The Role Of Lockups In Initial Public Offerings
By: Profs. Alon Brav and Paul Gompers Duke University (AB) and Harvard University and National Bureau of Economic Research (PG)
Review of Financial Studies - Vol. 16, No. 1, Pgs. 1-29
What lockups signal.
IPO issuers often face a lockup period, typically 180 days following the offering, during which managers and certain other investors may not sell their stock. Profs. Alon Brav and Paul Gompers examine three explanations for why companies going public will agree to a lockup. Lockups may signal information about the quality of the firm going public. If the public knows little or nothing about a firm, the fact that its managers agree to hold on to the stock could offer assurances of quality. Lockups may serve as a commitment device, calming investors' fears that corporate insiders might not act in the shareholders' best interests after the offering.
Lockups may serve as the underwriter's means of extracting additional compensation from the issuer. Because underwriters must consent to sales by insiders prior to the lockup expiration date, they stand to earn additional compensation through a block transaction or a seasoned equity offering. Underwriters with high prestige and best services would therefore have the clout to demand the longest lockup periods. Of the three theories, the lockup-as-commitment-device seems most supported by the authors' study of some 2,800 initial offerings during the 1990s.
Which firms need a longer lockup. Firms the public deems most likely to act irresponsibly after the IPO face a longer lockup period, the authors theorize. Information about the firm's prospects comes to light during the lockup, according to the theory, and investors will be more willing to capitalize on the information if they know that insiders are restricted from doing so themselves.
Younger firms, those with unappealing financial characteristics, or those with highly volatile stock prices would have longer lockups than those with more desirable characteristics, better reputations, more prestigious underwriters or VC backers. Stock price reaction when the lockup expires should be less marked for companies with greater informational transparency.
Mostly a matter of trust. Firms with the highest quality underwriters and those with venture capital backing have the shortest lockup periods, an indication that investors view these firms as less likely to take advantage of them than companies associated with less prestigious backers or weaker financial characteristics. The authors observe that 15% of the IPO issuers had insider sales prior to the lockup's expiration; higher-quality companies saw the highest rate of pre-expiration insider selling. Companies with less stellar credentials saw the lowest level of pre-expiration insider selling, since such activity would likely draw investor scrutiny and concern.
P>
Abstracted from Abstracted from Review of Financial Studies, published for the Society For Financial Studies by Oxford University Press, 2001 Evans Road, Cary, NC 27513-2009.
Return to Library of Business Information
Get-the-Job-Done
So You Can Go Out To Play
Money-Back Guarantee!
Download and use any JIAN product for 60 days to become convinced that it's what we say it is. More than likely, after 60 days, you'll be happily down the road with a completed project. If it's not right for you, we will give all your money back for the asking — there's nothing to ship, no taxes, and you can even keep the software!
