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The joint decision to signal through IPO underpricing and lockup

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  • Chih-Jen Huang
  • Ching-Hsiang Chao
  • Tsai-Ling Liao

Abstract

Before Initial Public Offerings (IPOs), the decisions on the offering price and lockup are made simultaneously. This study examines the endogenous relation between underpricing and lockup duration. We adopt the three-stage least square method to estimate a set of the simultaneous equations model, including the inverse Mill's ratio to correct the self-selective bias into the use of lockup. The results indicate a negative association between underpricing and the length of lockup, supporting our signalling hypothesis that IPO firms and underwriters employ underpricing and lockup duration in a substituted way to signal the firm quality. The bivariate analysis provides further support for this view. Our findings offer new insights into how pre-IPO shareholders and underwriters might combine both the underpricing and lockup strategies to signal.

Suggested Citation

  • Chih-Jen Huang & Ching-Hsiang Chao & Tsai-Ling Liao, 2010. "The joint decision to signal through IPO underpricing and lockup," Applied Economics Letters, Taylor & Francis Journals, vol. 17(10), pages 955-961.
    • Handle: RePEc:taf:apeclt:v:17:y:2010:i:10:p:955-961
    DOI: 10.1080/13504850802616476
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    Cited by:

    1. Enrique Fatás & Nikolaos Georgantz & Juan A. Máñez & Gerardo Sabater, 2013. "Experimental duopolies under price guarantees," Applied Economics, Taylor & Francis Journals, vol. 45(1), pages 15-35, January.

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