The Role of Lock-Ups in Initial Public Offerings

Posted: 1 Nov 2001

See all articles by Alon Brav

Alon Brav

Duke University - Fuqua School of Business

Paul A. Gompers

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)


This paper explores the role of investment banks and lock-up provisions in the market for new equity issues. In a sample of 2,794 IPOs, we test three potential explanations for the existence of lock-ups: (i) lock-ups serve as a signal of firm quality; (ii) lock-ups are a commitment device to alleviate moral hazard problems; and (iii) lock-ups serve as a mechanism for underwriters to extract additional compensation from the issuing firm. Our results support the commitment hypothesis. Insiders of firms that are associated with greater potential for moral hazard in the aftermarket lock-up their shares for a longer period of time. We also find that insiders of firms that have experienced larger excess returns, that are backed by venture capitalists, or that go public with high quality underwriters, are more likely to be released from the lock-up restrictions. In addition, we find that the average abnormal return at lock-up expiration is -2%. The price drop associated with this expiration is substantially higher for firms that are venture-backed.

JEL Classification: G00, G14, G24, G3

Suggested Citation

Brav, Alon and Gompers, Paul A., The Role of Lock-Ups in Initial Public Offerings. Review of Financial Studies, Forthcoming. Available at SSRN:

Alon Brav (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-2908 (Phone)
919-684-2818 (Fax)

Paul A. Gompers

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6297 (Phone)
617-496-8443 (Fax)

Harvard University - Entrepreneurial Management Unit ( email )

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

B-1050 Brussels


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