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The Role of Lockups in Stock Mergers

Author

Listed:
  • Zhong Chen

    (King’s Business School, King’s College London, London WC2B 4BG, United Kingdom)

  • Yi Liu

    (Research Institute of Economics and Management, Southwestern University of Finance and Economics, Chengdu 611130, China)

  • Stefano Rossi

    (Bocconi University, 20136 Milano, Italy)

Abstract

We document the frequent use of stock lockup agreements in mergers and acquisitions (M&As) paid in stock and examine the corporate determinants and consequences of the use and duration of lockups. Lockup agreements prohibit target shareholders from selling shares issued by the acquirer as a means of payment for a prespecified period. We find support for the hypothesis that target shareholders agree to lockups to precommit to hold on to the acquirer’s stock if they believe the merger’s long-term fundamentals are strong. Consistent with our hypothesis, lockups come with larger acquirer announcement returns, particularly when acquirer valuations are high; ex ante, lockup adoption likelihood increases with acquirers’ valuation. Lockups also come with higher deal completion likelihood, shorter merger negotiations, and higher long-term operating performance. We conclude the market interprets lockups as a signal of strong fundamentals, particularly when acquirers’ valuations are high.

Suggested Citation

  • Zhong Chen & Yi Liu & Stefano Rossi, 2025. "The Role of Lockups in Stock Mergers," Management Science, INFORMS, vol. 71(9), pages 7286-7311, September.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:9:p:7286-7311
    DOI: 10.1287/mnsc.2023.00993
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