Do investors value SEO lockup agreements?

The lockup is an agreement between issuing firms and underwriting investment bankers that prohibits firm insiders from selling shares prior to lockup expiry. Using a manually corrected sample of 7546 SEOs between 1988 and 2007, this study investigates the role of these agreements by separately examining the valuation of primary and secondary market investors. Reported evidence shows that announcement day returns increase with the presence and length of lockup, which suggests that secondary market investors value lockups positively. Tests on the SEO discount provide no evidence that primary market investors value lockups. Long-term performance tests also reveal no evidence that lockup SEOs have superior quality. These findings are consistent with the commitment device hypothesis, stating that lockups serve as a commitment mechanism to ameliorate moral hazard issues.