Large Shareholders and Disclosure Strategies: Evidence from IPO Lockup Expirations

Abstract:     
We examine the effect of large shareholders’ selling incentives on firms’ voluntary disclosure choices in the setting of IPO lockup expirations. Because lockup expirations involve large-scale selling by pre-IPO shareholders, we can identify influential shareholders with strong ex ante selling incentives. We find that firms are more likely to delay the disclosure of bad news in the lockup expiration quarter, consistent with their following a disclosure policy that favors pre-IPO shareholders with selling incentives. This effect is stronger for firms with higher selling incentives (as measured with venture-capital backing or high levels of expected selling) and further concentrated in firms with high uncertainty and low litigation risk. Using ex post selling after lockup expiration by venture capitalists (VCs), an influential and easily identifiable group of pre-IPO shareholders, we show that high levels of realized selling by pre-IPO shareholders are associated with delayed disclosure of bad news but only when managers do not concurrently sell. By delaying bad news, firms postpone the negative returns associated with that news until earnings announcements and mitigate the unfavorable price impact of selling after lockup expiration.

Number of Pages in PDF File: 51

Keywords: Earnings forecasts, earnings guidance, voluntary disclosure, IPO, lockup, venture capitalists

JEL Classification: M41, M45, G24, G12, G14, D82

working papers series