Moral Hazard, Asymmetric Information and IPO Lockups

36 Pages Posted: 21 Mar 2007 Last revised: 16 Dec 2009

See all articles by Chris Yung

Chris Yung

University of Virginia - McIntire School of Commerce

Jaime F. Zender

University of Colorado at Boulder - Department of Finance

Date Written: September 12, 2006

Abstract

Moral hazard and asymmetric information have both been proposed as the motive behind the use of IPO lockup provisions, with each receiving empirical support in the literature. Rather than consider them to be mutually exclusive motivations, we hypothesize that each is dominant for a different set of firms. We provide novel empirical support for the underwriter certification hypothesis then use this hypothesis to categorize the firms in our sample. Firms that are certified by a reputable underwriter see a reduction in the severity of asymmetric information relative to other firms and therefore will be more likely to see moral hazard as the friction that motivates the use of the lockup provision. For those firms that are unable to obtain high reputation underwriter certification it is relatively more likely that asymmetric information is the motivation for the use of the lockup provision. Based on this separation of firms we introduce and provide empirical support for a novel set of hypotheses concerning the lockup period.

Keywords: IPO, Lockup, Underwriter Quality, Asymmetric Information

Suggested Citation

Yung, Chris and Zender, Jaime F., Moral Hazard, Asymmetric Information and IPO Lockups (September 12, 2006). Available at SSRN: https://ssrn.com/abstract=972070 or http://dx.doi.org/10.2139/ssrn.972070

Chris Yung

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-242-0836 (Phone)

Jaime F. Zender (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Boulder, CO 80309
United States
303-554-1665 (Phone)
303-492-4689 (Fax)

HOME PAGE: http://www-bus.colorado.edu/faculty/Zender/

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