LA AVENTURA DE MADRID

Signalling and commitment have been suggested to be the main reasons behind the presence of lockup provisions in academic literature as discussed above. However, both of these explanations suggest that lockups exist as a mechanism to reduce the risk to the IPO investors. The two studies which examine these motivations separately and come to opposing conclusions are Brav and Gompers (2003) and Brau et al. (2005). Brav and Gompers (2003) find support for the commitment device hypothesis of lockups and reject the signalling explanation for lockups. They argue that younger firms, firms with low cash flow margin and low book-to-market ratio and firms with high risk suffer from greater potential for moral hazard and are likely to accept longer lockups to show their commitment. Their empirical results support the prediction that longer lockups reduce moral hazard after the IPO. On the other hand, Brau et al. (2005) find empirical support for their signalling model of IPO lockups and show that firms with higher degree of information asymmetry and low level of idiosyncratic risk have longer lockups. Moreover, Brau et al. note that some of the proxies used by Brav and Gompers (2003) for commitment hypothesis are also consistent with the signalling hypothesis. Yong and Zender (2010) in a recent study resolve the apparent conflict mentioned in the previous two studies. They argue that asymmetric information and moral hazard are not mutually exclusive motivations and that both of these motivations are dominant for different types of firms. They find results to support their predictions and assert the need to identify the moral hazard and asymmetric information firms separately when examining the motivations for lockups. Two recent studies on the US IPO and SEOs find support for the commitment hypothesis of the lockups. Gao and Siddiqi (2012) use operating

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and stock return performance after the IPO as a measure of issuing firm quality and relate it with the length of lockup period. They find that longer lockups are related to poor long run performance and conclude that longer lockups are used to mitigate agency problem (commitment hypothesis) and not to signal issuer’s quality at the IPO. Cline et al. (2014) study the lockups in SEOs and find that announcement day returns increase with the presence of length of lockup. However, they report that SEO discount and long run performance are not related to the lockup length. They report that their overall findings are consistent with the commitment device hypothesis instead of signalling theory.

Other studies on lockups find empirical evidence to supports either or both of the signalling and commitment motivations. For example, Arthurs et al. (2009) find that longer lockups act as substitute quality signal to reputed underwriter and VC backing for a sample US IPOs. Moreover, longer lockups help to assuage the investor concerns in ventures with high uncertainty in the form of going concern issues and reduce the underpricing for these ventures. Karpoff et al. (2013) find that longer lockups guarantee the quality of new equity issues by reducing information asymmetry and represent a contracting solution to agency problem by deterring opportunistic insider trading in a sample of US seasoned equity offerings (SEOs). Espenlaub et al. (2001), in first ever study of UK IPO lockups, find evidence that is consistent with the commitment device hypothesis at least in case of high tech IPOs on LSE Main Market. They also suggest that issuing firms might use underwriter reputation as a substitute signal of quality to the lockup agreements consistent with the Arthurs et al. (2009). Hoque (2011) examines the heterogeneity and different types of lockups on LSE Main Market and AIM for a sample of 831 IPOs from 1999-2006. The results show a strong evidence of information asymmetry explanation and partial support of the agency (commitment) explanation for the choice of lockups. Ahmad and Jelic (2014) study the

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survival of LSE Main Market IPO in relation to the lockup period and find that longer lockups predict better survival rate and time for IPOs which is consistent with the signalling hypothesis of IPOs.

The evidence from other markets/countries regarding the motivations for lockups also supports both motivations for lockups. Goergen et al. (2006b) test whether lockup agreements mitigate problems of agency and asymmetric information in France and Germany. Their study is interesting in the sense that both of the countries have requirements of mandatory lockup periods. They find that lockup contracts are not only determined by firm characteristics but also by shareholder type. Their results suggest that firms with higher uncertainty have longer lockup periods and German firms may use the lockup period as a signal of quality as a substitute of underpricing. Bessler and Kurth (2007) investigate German VC backed IPOs and find that there are serious agency problems particularly when banks are also underwriters and VCs. They report lower underpricing and higher long- run performance for non-bank VC IPOs who accepted longer lockup than the minimum required and suggest that longer lockups signal the quality of IPOs. However, extended lockups in case of bank affiliated VC IPOs do not serve as a commitment device, inconsistent with the findings of (Brav and Gompers, 2003). Chong and Ho (2007) study the lockups and earnings forecasts disclosures in Singapore IPOs. They observe longer lockups for firms which are subject to greater asymmetric information and moral hazard in line with Brau et al. (2005) and Brav and Gompers (2003). Moreover the firms with longer lockups make conservative forecast because the longer lockup removes the incentive to make overly optimistic forecast. Their results suggest that lockups act as complement to earnings forecasts, similar to the complementary relation between lockups and retained ownership (Courteau, 1995).

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