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Contracting under asymmetric information: Evidence from lockup agreements in seasoned equity offerings

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  • Karpoff, Jonathan M.
  • Lee, Gemma
  • Masulis, Ronald W.

Abstract

We document the frequent use of lockup agreements in seasoned equity offerings (SEOs) and examine the determinants of their use, duration, and early release. We find that the likelihood of an SEO lockup and its duration are positively related to issuer information asymmetry measures. Lockup duration is negatively related to underwriter spreads and underpricing, indicating that lockups lower expected flotation costs. Lockups are frequently released early following share prices rises. We conclude that lockups represent a contracting solution to asymmetric information and agency problems that plague equity issues by helping to insure SEO quality and deter opportunistic insider trading.

Suggested Citation

  • Karpoff, Jonathan M. & Lee, Gemma & Masulis, Ronald W., 2013. "Contracting under asymmetric information: Evidence from lockup agreements in seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 110(3), pages 607-626.
  • Handle: RePEc:eee:jfinec:v:110:y:2013:i:3:p:607-626
    DOI: 10.1016/j.jfineco.2013.08.015
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    Cited by:

    1. Kryzanowski, Lawrence & Mohsni, Sana, 2015. "Earnings forecasts and idiosyncratic volatilities," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 107-123.
    2. repec:eee:intfin:v:49:y:2017:i:c:p:184-199 is not listed on IDEAS
    3. repec:eee:jfinec:v:126:y:2017:i:1:p:171-199 is not listed on IDEAS
    4. Li, Ting & Zaiats, Nataliya, 2017. "Information environment and earnings management of dual class firms around the world," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 1-23.
    5. repec:eee:corfin:v:45:y:2017:i:c:p:64-83 is not listed on IDEAS
    6. Paul Borochin & Jie Yang, 2016. "The Effects of Institutional Investor Objectives on Firm Valuation and Governance," Finance and Economics Discussion Series 2016-088, Board of Governors of the Federal Reserve System (U.S.).
    7. Cline, Brandon N. & Fu, Xudong & Tang, Tian, 2015. "Do investors value SEO lockup agreements?," Journal of Business Research, Elsevier, vol. 68(2), pages 314-321.

    More about this item

    Keywords

    Lockups; Information asymmetry; Seasoned equity offerings;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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