76 Pages Posted: 1 Oct 2011 Last revised: 30 Sep 2013
Date Written: February 18, 2012
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.
Keywords: seasoned equity offerings, lockups, information asymmetry
JEL Classification: G32
Suggested Citation: Suggested Citation
Karpoff, Jonathan M. and Lee, Gemma and Masulis, Ronald W., Lockup Agreements in Seasoned Equity Offerings: Evidence of Optimal Contracting (February 18, 2012). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1933995 or http://dx.doi.org/10.2139/ssrn.1933995
By Alex Edmans