Voluntary Disclosure Strategy Around IPO Lockup Expirations

Abstract:     
We examine the impact of insider selling incentives on strategic disclosure behavior by firms. Specifically, we examine management forecasts of IPO firms from the date of going public through the four quarters following the lockup expiration date. Lockup expirations represent the first time that insider shareholders can sell their stock since the IPO and are characterized by a significant increase in trading volume. Using management forecasts as a proxy for voluntary disclosures, we examine the impact of ex ante insider selling incentives on the forecasting behavior of firms. We provide evidence on the propensity to issue forecasts, the bias in these forecasts, and the market reaction to the forecasts. We find that firms delay bad news disclosures until the earnings announcement in the lockup expiration quarter. Firms also bias their forecasts more optimistically when trading incentives are present. We conjecture that the low litigation risk that persists after lockup expiration enables these strategic forecasts. The market does not appear to fully comprehend these incentives.

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

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

Working Paper Series