Role of asymmetric information and moral hazard on IPO underpricing and lockup

• A unique hand collected data on lockups from the UK market.
• I separate the asymmetric information sample and the moral hazard sample by conducting event studies on insider purchases and sales.
• With those partitioned samples I show that, the UK lockups emanate from moral hazard rather than information asymmetry.
• Underpricing and lockup work as substitute signals in the UK.

This paper analyses the role of asymmetric information and moral hazard on IPO underpricing and lockups. I document that high information asymmetry is related to underpricing while the lockup length and lockup expiration return is related to moral hazard. Accordingly, lockup length and underpricing work as substitute signals. These results relate to the UK's unique institutional settings: long and diverse lockups, and a close relationship between the issuing company and the corporate broker. Moreover, director ownership affects lockup length and lockup expiration return in a non-linear fashion.