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Lock-In Agreements in Venture Capital Backed UK IPOs


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  • Espenlaub, S.
  • Goergen, M.
  • Khurshed, A.
  • Renneboog, L.D.R.

    (Tilburg University, Center for Economic Research)


This paper examines the impact of venture-capital backing of UK companies issuing shares at flotation on the characteristics of the lock-in agreements entered into by the existing shareholders, and on the abnormal returns realised around the expiry of the directors' lock-in agreements.The study examines the lock-in agreements of a sample of 186 UK IPOs issued during 1992-98. 103 of these companies had venture-capital backing at the IPO.The sample is also broken down into firms classified by industrial sector: of 103 VC backed companies 48 are high-tech, and among the 83 firms without VC backing 33 are high-tech.We find that lock-in agreements in the UK show much more variety in terms of the contractual detail than US agreements.Lock-in periods are particularly long for venture-backed high-tech companies.By contrast, for firms not in the high-tech sector, venture-capital backing appears to reduce the directors' lock-in periods.This suggests that for UK IPOs venture-capital backing does not serve as a substitute for lock-in agreements.Examining the proportion of locked-in directors' shares, we find it to be significantly higher in VC-backed firms as compared to firms without VC backing in the sample of firms not classified as high tech.This suggests that for firms likely to face only moderate information asymmetries (i.e. those not in high-tech industries), venture-capital backing of the IPO is not used as a substitute for, but rather as a complement to, lock-in agreements.The higher proportion of locked-in directors' shares among VC-backed companies (not in the high-tech sector) may be because the underwriters of VC-backed IPOs expect heavy sales by the VCs in the period after the IPO and decide to lock in the directors' shares and in order to limit the downward pressure of the VC's disposals on stock prices.Alternatively, if VCs do not sell out completely in the IPO, as reported by Barry et al. 1990, they may seek to align the directors' interests with their own by locking the directors in.We also examine the share-price performance of IPOs with and without VC backing around the time of the expiry of the lock-in agreements, and find that the CAARs for the VC-backed stocks are lower for most of the short windows around the expiry date, both for the sample as a whole and separately for each industry sector.For the sample of 28 VC-backed stocks, the CAARs are statistically significantly less than zero at the 1% level for the narrow one-to three-day windows around the expiry date.For the VC-backed stocks, the CAARs range from -1.2% to -1.6% (and even to -2% for the 11-day window, but this result is not statistically significant), while the corresponding CAARs for the stocks without VC backing range only from -0.2% to -0.8.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2002-46.

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Date of creation: 2002
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Handle: RePEc:dgr:kubcen:200246

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Keywords: initial public offerings; lock-in; high-tech; venture capital; IPO;

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  1. Yasushi Hamao & Frank Packer & Jay R. Ritter, 1998. "Institutional affiliation and the role of venture capital: evidence from initial public offerings in Japan," Staff Reports 52, Federal Reserve Bank of New York.
  2. Franks, Julian & Mayer, Colin & Renneboog, Luc, 2001. "Who Disciplines Management in Poorly Performing Companies?," Journal of Financial Intermediation, Elsevier, vol. 10(3-4), pages 209-248, July.
  3. Laura Casares Field, 2001. "The Expiration of IPO Share Lockups," Journal of Finance, American Finance Association, vol. 56(2), pages 471-500, 04.
  4. Brav, Alon & Gompers, Paul A, 1997. " Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies," Journal of Finance, American Finance Association, vol. 52(5), pages 1791-1821, December.
  5. Courteau, Lucie, 1995. "Under-Diversification and Retention Commitments in IPOs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(04), pages 487-517, December.
  6. Susanne Espenlaub & Ian Garrett & Wei Peng Mun, 1999. "Conflicts of interest and the performance of venture-capital-backed IPOs: A preliminary look at the UK," Venture Capital, Taylor & Francis Journals, vol. 1(4), pages 325-349, October.
  7. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
  8. Marc Goergen & Luc Renneboog, 1999. "Strong Managers and Passive Institutional Investors in the UK," Working Papers 1999.21, Fondazione Eni Enrico Mattei.
  9. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
  10. Paul Gompers & Josh Lerner, 1998. "Conflict of Interest in the Issuance of Public Securities: Evidence from Venture Capital," NBER Working Papers 6847, National Bureau of Economic Research, Inc.
  11. Christopher B. Barry, 1994. "New Directions in Research on Venture Capital Finance," Financial Management, Financial Management Association, vol. 23(3), Fall.
  12. Susanne Espenlaub & Marc Goergen & Arif Khurshed, 2001. "PO Lock-in Agreements in the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(9&10), pages 1235-1278.
  13. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
  14. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
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Cited by:
  1. Goergen, M. & Renneboog, L.D.R. & Khurshed, A., 2004. "Shareholder Lockup Agreements in the European New Markets," Discussion Paper 2004-121, Tilburg University, Center for Economic Research.
  2. Goergen, M. & Renneboog, L.D.R., 2005. "Shareholder Lock-In Contracts: Share Price and Trading Volume Effects at the Lock-In Expiry," Discussion Paper 2005-030, Tilburg University, Tilburg Law and Economic Center.
  3. John Board & Alfonso Dufour & Charles Sutcliffe & Stephen Wells, 2005. "A False Perception? The relative riskiness of AIM and listed Stocks," ICMA Centre Discussion Papers in Finance icma-dp2006-01, Henley Business School, Reading University.


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