The influence of lock-up provisions on IPO initial returns: Evidence from an emerging market

• Main Authors: Mohd Rashid, Rasidah, Abdul Rahim, Ruzita, Yong, Othman
• Format: Article
• Language: English
• Published: Elsevier B.V. 2014
• Subjects: HC Economic History and Conditions
• Online Access: http://repo.uum.edu.my/18858/1/ES%2038%202014%20487-501.pdf; http://repo.uum.edu.my/18858/; http://doi.org/10.1016/j.ecosys.2014.03.003

A lock-up agreement ensures that major shareholders retain significant economic interest in the companies following the IPOs. Rationally, these insiders will not adhere to the lock-up agreement unless the benefits of doing so can more than offset the costs. Therefore, in an environment characterized by high information asymmetry, a lock-up agreement can serve as an effective mechanism to signal the risk or quality of firms. This article examines whether the lock-up ratio and lock-up period affect the initial returns, using a sample of 384 IPOs listed on Bursa Malaysia between 2000 and 2012. The results of the cross-sectional multiple regression show that the lock-up period is significantly positive in explaining IPO initial returns, but the lock-up ratio is not. The findings provide new insights for testing the signaling content of lock-up provisions, particularly in a setting characterized by high information asymmetry.