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Lockups Revisited

Published online by Cambridge University Press:  06 April 2009

James C. Brau ,
Val E. Lambson  and
Grant McQueen
James C. Brau
Affiliation:
jbrau@byu.edu, Department of Business Management, Marriott School, TNRB 660, Brigham Young University, Provo, UT 84602.
Val E. Lambson
Affiliation:
val_lambson@byu.edu, Department of Business Management, Marriott School, TNRB 660, Brigham Young University, Provo, UT 84602.
Grant McQueen
Affiliation:
mcqueen@byu.edu, Department of Business Management, Marriott School, TNRB 660, Brigham Young University, Provo, UT 84602.
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Abstract

Lockups are agreements made by insiders of stock-issuing firms to abstain from selling shares for a specified period of time after the issue. Brav and Gompers (2003) suggest that lockups are a bonding solution to a moral hazard problem and not a signaling solution to an adverse selection problem. We challenge this conclusion theoretically and empirically. In our model, insiders of good firms signal by putting and keeping (locking up) their money where their mouths are. Our model yields two comparative statics: lockups should be shorter when a firm is i) more transparent and/or ii) more risky. Using a sample of 4,013 initial public offerings and 3,279 seasoned equity offerings between 1988 and 1999, we find empirical support for our theoretical predictions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 3 , September 2005 , pp. 519 - 530
Copyright
Copyright © School of Business Administration, University of Washington 2005

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