Why Do Directors Change Their Ownership During IPO Lockup Arrangements?
45 Pages Posted: 14 May 2014
Date Written: May 14, 2014
We test a number of hypotheses to assess changes in director ownership during lockup periods. We find that these transactions are additional signalling devices. Our results also imply that they are contractual arrangements between directors and underwriters, as directors increase their holdings after significant price decline, in line with the price support hypothesis, but they decrease their ownership after price run-up, consistent with the early lockup releases hypothesis. Stock prices decline when directors decrease their holdings, like the seasoned firms. Interestingly, stock prices decline significantly after ownership increases. The overall effect of director purchases is different as compared to seasoned firms, and it reduces the heavy decline in share prices for those IPOs. Our results could imply that the valuation uncertainty of IPOs makes the precision of directors’ information content weak and their profitability low.
Keywords: Initial public offering, Lockup agreements, Director ownership, Information asymmetry, London Stock Exchange
JEL Classification: G12, G14, G24, G32
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