Lockup Agreements in Seasoned Equity Offerings: Evidence of Optimal Contracting
Jonathan M. Karpoff
University of Washington - Michael G. Foster School of Business
Seton Hall University - W. Paul Stillman School of Business
Ronald W. Masulis
University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN)
February 18, 2012
Journal of Financial Economics (JFE), Forthcoming
We document the frequent use of lockup agreements in seasoned equity offerings (SEOs), and examine the determinants of their use, duration, and early release. From 1996 through 2006, 93.8% of all SEOs included lockups, which is comparable to the 96.6% lockup rate for IPOs during the same period. The likelihood of an SEO lockup and its duration both are positively related to the degree of information asymmetry between insiders and outside investors. Lockups tend to be released early when share prices increase after the SEO. These results indicate that lockups help to guarantee the SEO’s quality by guarding against opportunistic selling by insiders, particularly when the opportunity for mispricing is large. That is, lockups represent a contracting solution to economize on the asymmetric information and agency problems that plague equity issues.
Number of Pages in PDF File: 76
Keywords: seasoned equity offerings, lockups, information asymmetry
JEL Classification: G32Accepted Paper Series
Date posted: October 1, 2011 ; Last revised: September 30, 2013
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