Large Shareholders and Disclosure Strategies: Evidence from IPO Lockup Expirations

Abstract

We examine the effect of large shareholders’ selling incentives on firms’ voluntary disclosure choices around IPO lockup expirations. Lockup expirations are followed by large scale selling by influential pre-IPO shareholders providing a good setting for testing the effect of ex ante selling incentives on disclosure. We find that firms with bad news are more likely to delay disclosures in the lockup expiration quarter, consistent with their following a disclosure policy that allows pre-IPO shareholders to sell shares before the news is incorporated in the stock price. This effect is stronger when ex ante selling incentives are greater and further concentrated in firms with high uncertainty and low litigation risk. We also find that higher pre-IPO ownership by venture capitalists (VCs), influential pre-IPO shareholders who reduce their ownership significantly after the lockup expires, is associated with delayed disclosure for bad-news firms. Tests using ex post selling after lockup expiration show that high levels of selling by VCs are associated with delayed disclosure for bad-news firms but only when managers do not concurrently sell. By delaying disclosures, bad-news firms postpone the negative returns associated with that news until earnings announcements and mitigate the unfavorable price impact of selling after lockup expiration.