IPO lock-up: a review and assessment

Abstract

Initial public offering (IPO) lock-up is a bonding mechanism that restricts pre-IPO shareholders and insiders from selling a specific percentage of the shares over a stipulated period after the IPO. IPO lock-up has enormous implications in the real business world, and research on IPO lock-up is extremely broad. We synthesize the theories and findings in the IPO lock-up literature. Based on a rigorous reiterative systematic review, our study sub-divides lock-up literature into five major themes. First, we discuss three types of lock-up settings across the globe and the changing role of the decision-makers in varying settings. Second, we discuss the motives served through IPO lock-up, including signaling solution, firm commitment, and earnings forecast credibility. Third, we synthesize the literature on change in the market microstructure concerning the change in share prices, bid-ask spread, trading volume, and short selling activity around the IPO lock-up expiration. We also discuss the macro-level effect of lock-up expiration linked to the crash of internet stocks. Fourth, we throw light on the factors explaining these anomalous negative share price reactions around unlock events. In line with the wealth maximization objective, insiders of the firm tend to profitable exit. The fifth theme discusses several exit strategies applied by locked insiders for a profitable exit on lock-up expiration. We aim to minimize the recycled research in the field of IPO lock-ups and help researchers produce meaningful and novel research. In line with this, we attempt to focus on the direction which extant literature has built upon; thereafter, we specify directions for future research. The review is worth reading and targeted toward academic researchers, decision-makers in firms, policymakers, and investors in general.