Signaling and initial public offerings: The use and impact of the lockup period

To reduce information asymmetries for potential investors considering investment in an IPO venture, owners can signal the firm's longer-term viability and quality in several ways. The lockup period, is one signal that can be offered. We investigated the lockup period of a sample of 640 ventures going through the IPO and find that a longer lockup period acts as a substitute signal to venture capital (VC) and prestigious underwriter backing. Furthermore, we find that ventures which have a going concern issue can reduce the amount of underpricing at the time of the IPO by accepting a longer lockup period.

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