Mandatory lock-up provision, retained ownership and IPO valuation in an emerging country

Purpose - This paper aims to explore how lock-up provisions and the percentages of shares retained by pre-initial public offering (IPO) shareholders are related to the valuation of IPOs. Design/methodology/approach - Using a dataset of 450 Malaysian IPOs from January 2000 to December 2019, the study employed ordinary least squares (OLS) regression and quantile regression to analyze the impacts of lock-up provision and retained ownership on the valuation of IPOs. Robustness tests and endogeneity tests were used to analyze the sample. Findings - The study’s outcomes revealed that higher lock-up ownerships in IPOs led to undervaluation by underwriters. This finding implies that by increasing the percentages of locked shares, companies can mitigate the aftermarket moral hazards. Further, consistent with signaling theory, IPOs with greater retained ownerships during the pre-reform 360-day lock-up period commanded higher valuations, confirming the function of retained ownership as a credible signal of firm quality. The study also found a distinct shift: while higher lock-up ownerships were associated with undervaluation during the pre-reform period, greater retained ownerships were linked with significant positive valuations post-reform (180-day lock-up). This finding provides empirical support for the commitment theory. Practical implications - The study’s findings hold practical implications for policymakers, suggesting a careful formulation is necessary when revising mandatory lock-up provisions and retained ownership. Originality/value - Contributing to the limited existing literature, this paper is among the first to examine the effects of lock-up provision and retained ownership related to IPO valuation, specifically in the Malaysian context. By analyzing pre- and post-reform IPOs, this study provides novel insights into how the regulatory change influences mandatory lock-up periods, lock-up ownership, and retained ownership, and how these factors, in turn, impact IPO values.