The influence of lock-up provisions on IPO initial returns: Evidence from an emerging market

- We examine the issue of lock-up provisions (ratio and period) in IPOs and their relationship with initial returns.
- Lock-up periods play a significant role in explaining the initial performance of IPOs.
- The role of lock-up ratios in influencing IPO initial returns is weak since the relationship is insignificant.
- The evidence is lenient toward suggesting that the lock-up ratio is more consistent with quality rather than with risk signaling.

A lock-up agreement ensures that major shareholders retain significant economic interest in the companies following the IPOs. Rationally, these insiders will not adhere to the lock-up agreement unless the benefits of doing so can more than offset the costs. Therefore, in an environment characterized by high information asymmetry, a lock-up agreement can serve as an effective mechanism to signal the risk or quality of firms. This article examines whether the lock-up ratio and lock-up period affect the initial returns, using a sample of 384 IPOs listed on Bursa Malaysia between 2000 and 2012. The results of the cross-sectional multiple regression show that the lock-up period is significantly positive in explaining IPO initial returns, but the lock-up ratio is not. The findings provide new insights for testing the signaling content of lock-up provisions, particularly in a setting characterized by high information asymmetry.