Lockup Agreements during Equity Issuance

Abstract

© 2017 Dr. Jinpeng LvInformation in the equity issuance market is highly asymmetric. Issuers have information advantages over investors and underwriters. Under asymmetric information, in the U.S., insiders from issuing companies and the underwriters voluntarily negotiate lockup agreements before the issuance of equity. Lockup agreements restrict insiders from selling their shares during the lockup period. However, underwriters have the right to release some or all of the locked-up shares, allowing insiders to sell their shares early at any time before the lockup expiration. Early sales refer to these insider sales during lockup periods. Lockups commonly exist in both initial public offerings (IPOs) and seasoned equity offerings (SEOs). This thesis investigates both the underwriters' incentives for early releases of locked-up shares during the IPO and the impact of IPO lockups on the decision to include SEO lockups. First, I study underwriters' incentives for early releases during an IPO. Ten percent of IPOs with lockup agreements have early sales by top executives. Early sales reduce the likelihood that IPO companies switch lead underwriters in their subsequent SEOs. IPO companies with early sales have better post-IPO performance than their counterparts without early sales. I argue that early sales reduce the signaling cost incurred by IPO lockups under asymmetric information. As information resolves after the IPO, good companies exercise early sales and directly benefit from the reduction in the signaling cost, while underwriters benefit from an increase in future business. Second, I examine the relation between IPO and SEO lockups. I find that underwriters are more likely to impose SEO lockups on issuers that have IPO lockups. I focus on a sample of issuers that conduct their first SEOs within four years after the IPO. I attribute the positive relation between SEO and IPO lockups partially to high correlations between company characteristics at the times of the IPO and the SEO. However, the commitment level of insiders in the issuing company does not offer an explanation for the positive relation between IPO and SEO lockups. Rather, the positive share price response to the announcement of the change from including lockups at the IPO to waiving lockups at the SEO implies that this change by underwriters conveys good news to the market, consistent with SEO lockups helping to reduce the information asymmetry in the equity issuance market