Retention of Equity: Can It Mitigate the Hidden Costs in Initial Public Offerings?

Abstract: It has been argued that the reason to include lockup agreements when going public is to alleviate the inefficiencies inherent to the IPO market. The hidden costs of asymmetric information and moral hazard have been proposed as the driver of the lockup length as well as the reason for the poor long-term performance of IPOs. In this thesis, we examine 2091 IPOs issued between 2000 and 2015, and hypothesize that asymmetric information and moral hazard are non-mutually exclusive problems. However, firms will exhibit a comparative exposure to one of the problems, which should consequently affect the long-term performance and the use of lockup agreements. We find evidence of the problems being non-mutually exclusive, and that all firms on average underperform long-term. However, there is no evidence of a relative difference in long-term performance between firms in regards to their relative exposure to asymmetric information and moral hazard. We also find that lockup agreements have experienced a homogenization over time. Rather than being driven by moral hazard and information asymmetry, the underlying rationale for the lockup length has merely become the mimicking of a standard. What used to be a contractual feature designed to mitigate the hidden costs inherent to going public, it seems as if lockup agreements have essentially become a purposeless IPO term.