Lockup Provision Research Articles

A review of the flipping activity of IPO: Evidences from developed and emerging markets

This paper reviews the literature on the flipping activity of initial public offerings (IPOs). To achieve the objective of this study, the papers indexed in the Scopus data repository and Google Scholar were employed. Based on the review, it was discovered that the extent of flipping varies significantly across countries. The emerging markets have a higher rate of IPO flipping than developed markets, which captures the high information asymmetry prevalence in the emerging markets. In addition, some significant variables were found to influence filliping activity. This includes underwriters, institutional investors, initial return, market conditions, lock-up provision, and issue size. Despite the identified variables that were found to influence flipping activity, there remain some variables that have not been considered. Some of these variables include institutional settings, listing regulations, political factors, and pre-IPO information in the prospectus that could give the research a promising field. The investigation of these variables will be assisting prospective investors in making informed decisions when investing in IPOs in order to maximise their profits

The role of mandatory lockup ratios in initial public offerings

This paper examines the potential explanations for Initial Public Offering (IPO) lockup provisions. This study uses cross‐sectional regression, robust least squares, and quantile regression on data for the period from 2000 to 2014. We explore the explanation of lockup as (i) a signal of firms' commitment to alleviate the moral hazard problem, or (ii) a signal of firms' qualities. The results document that firms retain higher proportions of their shares as a signal of commitment rather than quality. Besides that, firms with higher lockup ratios are more likely to engage high‐quality underwriters for their listing exercise. The findings suggest that although the regulation requires major shareholders to lockup their entire shareholdings until 6 months after the IPO listing, they tend to keep higher proportions than the minimum requirement of 45% of the enlarged issued and paid up capital as a signal of commitment towards reducing the moral hazard problem. Thus, investors should recognise the signalling role of the lockup provision when they make investment decisions. Policymakers need to pay attention to the formulation of lockup provisions. While lockup is mandatory, the different percentages of shares locked up are of interest to this study. Further, the findings highlight the importance of lockup provisions in boosting the confidence of investors to participate in IPOs. This study provides new empirical evidence regarding the role of the lockup provision.

Moderating Effect of Information Asymmetry on the Signalling Role of IPO Lockup Provision

This article examines the moderating effect of information asymmetry on the relationship between parameters of lockup provision and flipping activity of Malaysian initial public offerings (IPOs). While the main purpose of lockup provision is to promote commitment of major shareholders for the well-being of the IPO issuing companies at least throughout the lockup period, its role could also extend as a signalling device. Information asymmetry is prevalent in the context of IPOs because information on the issuing firms is normally very limited that the evaluation of the firms’ true value becomes difficult. This study postulates that the lockup provision has a greater influence on flipping activity in higher information asymmetry companies than in lower ones. Using data from 370 Malaysian IPOs issued from January 2000 to December 2012, the results of the multiple regression analyses show that both lockup ratio and lockup period have significantly negative impacts on flipping activities. Since lockup period is uniformly longer (1 year) prior to the 2008 Equity Guidelines revision, the results imply that investors have a greater tendency to flip during the post-2008 revision period when major shareholders are perceived to be less strongly accounted for their firms’ performance. The results also show that information asymmetry moderates the negative relationship between lockup provision and flipping activity, specifically, in regard to lockup period.

Impact of a regulatory change on initial performance of IPOs

The purpose of this paper is to examine the impact of the Malaysian IPO regulatory change involving lock-up provisions on the initial performance of Malaysian IPOs. This study examines the impact of the revision in the IPO lock-up provision that took effect on February 2008 on the initial returns of 373 IPOs listed between January 2000 and December 2012, using cross-sectional multiple regressions. The findings indicate that the dummy of the lock-up period is positive and significant, validating that the dramatic drop in initial performance of Malaysian IPOs is an attribute of the shorter lock-up period regime. The new shorter lock-up period regime leaves fewer opportunities for speculation activities through IPOs. Investors may strategise to participate in firms that report higher lock-up ratio as it is likely to increase the initial returns.

High Funding Risk, Low Return

I develop a simple model where hedge fund managers with a higher exposure to a common funding shock deliver lower subsequent returns. Empirically, I find that hedge funds with a higher loading on a simple funding risk measure generate lower returns than hedge funds with a lower loading on that measure. In line with the model predictions, I find that (i) this underperformance is driven by a high loading on adverse funding shocks, (ii) a higher loading on funding risk predicts lower fund flows, and (iii) the results are significantly weaker for funds that have a lockup provision.

Lockup Provision and Institution Investors Trading

The lock-up provision conveys important information about the ex-ante risk of an IPO. Using a unique trading data in pre-IPO market and a unique data of exact days of withdrawing lockup shares, we are able to test the trading behavior of institutional investors around the lockup announce day and expiration day using a sample of 218 IPOs firms from 2005 to 2011 in Taiwan. We are able to find that the abnormal returns of institutional investors are insignificant around the lockup announce day. Second, the relationship between the net buying and selling of institutional investor and cumulative returns around announce day is insignificant. Also, the relationship between lockup ratio and institutional investor trading around, and the relationship between the lockup ratio and initial return of IPOs are all insignificant. This implies that announcement of lockup ratio carries no information.We then examine whether the trading of institutional investors around the withdrawing of lockup shares affects long term performance. We do find that there is a positive relationship between foreign institution trading and ROE for one year after IPO. It implies that the trading behavior of institution investors around lockup expiration day contains information of long term performance.

A Two-Dimensional Approach in Examining IPO Behaviour in the Immediate Aftermarket: Malaysian Evidence

This paper examines the IPO anomalous behavior in the immediate aftermarket from two dimensions; initial return and flipping activity. In light of the commencement of lockup provision in May 1999 to displace the profit guarantee on issuing companies, this study examines the effect of both extent and length of the lockup provision on the behavior of the IPOs in the immediate aftermarket. Employing data of 383 Malaysian IPOs from January 2000 to December 2013, this study finds that both dimensions of lockup provision influence flipping activity via its committing role. The results implies that while initial returns are not affected by the imposition of lockup provision, the provision does play an effective role in restricting flipping activity of Malaysian IPOs.

Moderating Effect of Information Asymmetry on the Relationship between Lockup Provision and Flipping Activity

This paper examines the moderating effect of information asymmetry on the relationship between parameters of lockup provision and flipping activity of Malaysian IPOs. While the main purpose of lockup provision is to promote commitment of major shareholders for the well-being of the IPO issuing companies at least throughout the lockup period, its importance extends as a signaling device that can convey certain information to the investors about the issuers particularly in regard to their quality or risk. In discussing the issue of signaling, some researchers argue that the significance of a signaling mechanism is determined to some extent by the level of information asymmetry that the firms are facing. This issue is prevalent in the context of IPOs because informations on the issuing firms are normally very limited that the evaluation of the firms’ true value becomes difficult. This study postulates that the lockup provision has a greater influence on flipping activity in higher than lower information asymmetry companies. Using 370 Malaysian IPOs covering the period from January 2000 to December 2012, the results of the multiple regression analyses show that both lockup ratio and lockup period have significantly negative impacts on flipping activities. Since lockup period is uniformly longer (1 year) prior to the 2008 Equity Guidelines revision, the results imply that investors have a greater tendency to flip during the post-2008 revision period when major shareholders are perceived to be less strongly accounted for their firms’ performance. The results also show that information asymmetry moderates the negative relationship between lockup provision and flipping activity, specifically, in regards to lockup period.

Financial Analysts, Venture Capitalists, and the Expiration of IPO Lockup Provision

Financial Analysts, Venture Capitalists, and the Expiration of IPO Lockup Provision

Post-Initial Public Offering Earnings Management Driven by Insider Selling Motives: Using KOSDAQ Initial Public Offerings

This study examines whether initial public offering (IPO) managers overstate accruals before insider selling in order to gain profits from insider selling, and whether accrual inflations that are motivated by insider selling are pronounced when information asymmetry between managers and outsiders is high and managers have higher incentives to manage earnings. Furthermore, the study examines whether managers employ real activities management in addition to accrual management, and whether managers choose accrual management over real activities management, and vice versa. The results reveal that discretionary accruals are significantly positive in the year of the IPO (year 0) and in the year immediately following the IPO (year +1). However, discretionary accruals in only year +1 are positively related to insider selling by chief executive officers (CEOs) in year +2. This is due to the lockup provision that prohibits the largest shareholders of IPO firms from selling their shares for 2 years from the date of the IPO. Our findings also show that the CEOs of IPO firms are more likely to inflate earnings before insider selling when information asymmetry is high and when their incentives for earnings overstatement are high. We find that IPO managers engage in real activities management in addition to accrual management to inflate earnings before insider selling. In addition, real activities management is observed only when the magnitude of accrual management is low, indicating that the CEOs of IPO firms engage in real activities management when they are not flexible to manage earnings through accrual management.

Hedge Fund Regulation and Misreported Returns

Abstract This paper introduces a cross‐country law and finance analysis of the misreporting behaviour in the hedge fund industry in terms of smoothing returns so that a fund consistently generates positive returns. We find strong evidence that international differences in hedge fund regulation are significantly associated with the propensity of fund managers to misreport monthly returns. We find a positive association between wrappers and misreporting, particularly for funds that do not have a lockup provision. Also, we find some evidence that misreporting is less common among funds in jurisdictions with minimum capitalisation requirements and restrictions on the location of key service providers. We assess the robustness of our finds to a number of specifications, including, different specifications of misreporting bin widths, subsets of the data by fund type, as well as specifications controlling for collinearity and selection effects and other robustness checks. We show misreporting significantly affects capital allocation, and calculate the wealth transfer effects of misreporting and relate this wealth transfer to differences in hedge fund regulation.

Moral hazard, asymmetric information and IPO lockups

Moral hazard and asymmetric information have both been proposed as the motive behind the use of IPO lockup provisions, with each receiving empirical support in the literature. Rather than consider them to be mutually exclusive motivations, we hypothesize that each is dominant for a different set of firms. We provide novel empirical support for the underwriter certification hypothesis then use this hypothesis to categorize the firms in our sample. Firms that are certified by a reputable underwriter see a reduction in the severity of asymmetric information relative to other firms and therefore will be more likely to see moral hazard as the friction that motivates the use of the lockup provision. For those firms that are unable to obtain high reputation underwriter certification it is relatively more likely that asymmetric information is the motivation for the use of the lockup provision. Based on this separation of firms we introduce and provide empirical support for a novel set of hypotheses concerning the lockup period.

Share Restrictions, Risk Taking and Hedge Fund Performance

This paper examines the impact of share restrictions on the risktaking and on the performance of hedge funds using the Hedge Fund Research (HFR) database. Share restrictions, in the form of longer lockup as well as notice and redemption periods, provide ‡exibility for the managers. Our results suggest that this ‡exibility allows hedge fund managers with lockup provision to take an excess risk, which is not compensated, when performance is measured as a unit of the risk taken by the manager. Speci…cally, we …nd that typical hedge funds with a lockup provision deliver 5.6-6.6% (3.8-5.4%) lower Fung and Hsieh (2004) appraisal ratios (Sharpe ratios) compared to their peers without a lockup provision. The results remain consistent even after controlling for various database biases, alternative risk and performance measures, and nonlinearities in hedge fund returns.

Onshore and Offshore Hedge Funds: Are They Twins?

Contrary to offshore hedge funds, US-registered (“onshore”) funds are subject to strict marketing prohibitions, accredited investor requirements, limited number of investors, and tax disadvantage. We exploit this difference to test predictions about organizational design, capital flow, and fund performance. We find that onshore funds impose stronger share restrictions such as a lockup provision than offshore funds to deter redemptions, but hold more liquid assets to reduce the cost of liquidity- motivated trading. Our results show that capital flows are less sensitive to past performance in onshore funds than in offshore funds due to regulation on advertising, and the flow sensitivity difference affects performance. Liquidity-adjusted alpha is positive and significant (0.94% per month) only for stand-alone onshore funds that have not been affected by excess capital flows from offshore investors through a master-feeder structure.

Hedge Fund Regulation and Misreported Returns

This paper introduces a cross-country law and finance analysis of the misreporting behavior in the hedge fund industry in terms of smoothing returns so that a fund consistently generates positive returns. We find strong evidence that international differences in hedge fund regulation are significantly associated with the propensity of fund managers to misreport monthly returns. We find a positive association between wrappers and misreporting, particularly for funds that do not have a lockup provision. Also, we find some evidence that misreporting is less common among funds in jurisdictions with minimum capitalization requirements and restrictions on the location of key service providers. We assess the robustness of our finds to a number of specifications, including, different specifications of misreporting bin widths, subsets of the data by fund type, as well as specifications controlling for collinearity and selection effects and other robustness checks. We show misreporting significantly affects capital allocation, and calculate the wealth transfer effects of misreporting and relate this wealth transfer to differences in hedge fund regulation.

Moral Hazard, Asymmetric Information and IPO Lockups

Moral hazard and asymmetric information have both been proposed as the motive behind the use of IPO lockup provisions, with each receiving empirical support in the literature. Rather than consider them to be mutually exclusive motivations, we hypothesize that each is dominant for a different set of firms. We provide novel empirical support for the underwriter certification hypothesis then use this hypothesis to categorize the firms in our sample. Firms that are certified by a reputable underwriter see a reduction in the severity of asymmetric information relative to other firms and therefore will be more likely to see moral hazard as the friction that motivates the use of the lockup provision. For those firms that are unable to obtain high reputation underwriter certification it is relatively more likely that asymmetric information is the motivation for the use of the lockup provision. Based on this separation of firms we introduce and provide empirical support for a novel set of hypotheses concerning the lockup period.

Follow-on offerings

Previous research has determined that lockup provisions essentially defer sell-offs of shares by insiders, and therefore cause a pronounced decline in share price at the time the lockup provisions expire. However, some IPOs involve follow-on offerings that may allow some insiders to sell their shares before the lockup provision has expired. Our objective is to determine how follow-on offerings alter firm value above and beyond the typical lockup effects, and whether the effects are conditioned by firm-specific variables. We find that follow-on offerings elicit an average market response of 3.21% over a three-day period surrounding the filing date. In addition, the offerings experience adverse effects as of lockup expiration that are about 3.75% worse than other IPOs, after considering other factors. Based on the share price response at the time of the follow-on offering along with the share price response at the time of lockup expiration, the cumulative effects for IPOs complemented by follow-on offerings are about 6.96% weaker than for IPOs not complemented by follow-on offerings. Overall, follow-on offerings may benefit some insiders who can circumvent the lockup expiration date, at the expense of other investors.