Moral-hazard-asymmetric-information-and-IPO-lockups_2010_Journal-of-Corporate-Finance.docx
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1、Journal of Corporate Finance 16 (2010) 320332 Moral hazard, asymmetric information and IPO lockups Chris Yung , Jaime F. Zender 1 Leeds School of Business, University of Colorado at Boulder, United States a r t i c l e i n f o a b s t r a c t Article history: Received 3 November 2009 Received in rev
2、ised form 11 December 2009 Accepted 11 December 2009 Available online 7 January 2010 JEL classication: G24 G32 Keywords: Initial public offerings Asymmetric information Moral hazard IPO lockups 1. Introduction Moral hazard and asymmetric information have both been proposed as the motive behind the u
3、se of IPO lockup provisions, with each receiving empirical support in the literature. Rather than consider them to be mutually exclusive motivations, we hypothesize that each is dominant for a different set of rms. We provide novel empirical support for the underwriter certication hypothesis then us
4、e this hypothesis to categorize the rms in our sample. Firms that are certied by a reputable underwriter see a reduction in the severity of asymmetric information relative to other rms and therefore will be more likely to see moral hazard as the friction that motivates the use of the lockup provisio
5、n. For those rms that are unable to obtain high reputation underwriter certication it is relatively more likely that asymmetric information is the motivation for the use of the lockup provision. Based on this separation of rms we introduce and provide empirical support for a novel set of hypotheses
6、concerning the lockup period. 2010 Elsevier B.V. All rights reserved. Recently, considerable attention has been paid to understanding the lockup provision embedded in the contract between an underwriter and a rm engaged in its initial public offering of equity. This literature examines motivations f
7、or the lockup provision, the determinants of the length of the lockup period, and the returns around lockup expiration. Brav and Gompers (2003) and Brau et al. (2005) both examine the motivation for the use of the lockup provision and the determinants of the lockup length and come to opposing conclu
8、sions with the former reporting support for the hypothesis that the lockup provision is used to control moral hazard and the latter reporting support for the hypothesis that lockups are used to control adverse selection. Here, we re-examine this issue and offer a resolution for the apparent conict.
9、We posit that all rms suffer from both moral hazard and adverse selection problems. For some, moral hazard will be the dominant consideration in including the lockup provision in the IPO contract and in determining the lockup length, while asymmetric information will dominate for others. Based on th
10、is hypothesis and the idea that the signal produced by the choice of lockup period is not perfectly revealing we develop a set of testable predictions concerning the length of the lockup period. Underpricing, a central issue in the IPO literature, plays a major role in our analysis. Underpricing is
11、a particularly useful diagnostic in this environment because it is affected by information asymmetry but not by post-issue commitment problems.2 In such an environment, the empirical regularities seen in the full sample (for an “average” rm) do not accurately reect the behavior of * Corresponding au
12、thor. Tel.: +1 303 492 7437. E-mail addresses: chris.yungcolorado.edu (C. Yung), jaime.zendercolorado.edu (J.F. Zender). 1 Tel.: +1 303 492 4689. 2 IPO underpricing is caused by asymmetric information in several canonical models, e.g. Benveniste and Spindt (1989) and Rock (1986). We are not aware of
13、 a model in which underpricing is caused by ex-post commitment problems of insiders. Likewise, surveys such as Jenkinson and Ljungqvist (2001) and Ibbotson et al. (1994) do not entertain the notion that underpricing could be caused by ex-post managerial agency problems. Given that underpricing is re
14、solved extremely rapidly, it is difcult to imagine how it could serve to control moral hazard. 0929-1199/$ see front matter 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.jcorpn.2009.12.004 Contents lists available at ScienceDirect Journal of Corporate Finance journal h omepage: www.el sevier
15、. com/l ocate/j corpfi n C. Yung, J.F. Zender / Journal of Corporate Finance 16 (2010) 320332 321 rms for which asymmetric information is the dominant consideration in determining the lockup length nor the behavior of rms for which moral hazard is the dominant friction. We separate our sample based
16、on whether asymmetric information (the asymmetric information subsample) or moral hazard (the moral hazard subsample) is most likely to motivate the use and determine the length of the lockup. This sample bifurcation is the basis of our research design, and it leads to differential predictions on th
17、e co-movements of key variables. For example, consider a rm that suffers from both moral hazard and asymmetric information problems but for which moral hazard is the determinant of the lockup length. Because asymmetric information is present, the IPO is expected to exhibit underpricing. However, con
18、sider a hypothetical shock that increases the level of information asymmetry while leaving the severity of moral hazard unchanged. Such a shock will increase underpricing but not the lockup length for this rm. Conversely, consider a hypothetical shock increasing the severity of moral hazard while le
19、aving information asymmetry unchanged. Such a shock increases the lockup length but not underpricing. In either case, lockup length and underpricing should not co-vary in a cross section of such rms. Suppose instead that information asymmetry is the dominant consideration when choosing the lockup le
20、ngth. The effect of increasing the level of information asymmetry will be to increase both underpricing and the length of the lockup. A shock increasing the severity of the moral hazard problem, however, should not affect underpricing or the lockup length. We therefore predict that lockup length and
21、 underpricing exhibit a positive correlation in the information asymmetry sample. When the lockup is chosen to control a moral hazard problem, it will be chosen recognizing the personal cost to insiders of a poorly diversied position. A given level of control of the managerial moral hazard problem c
22、an be achieved with a combination of post-IPO shares and a given lockup. In order to maintain a constant level of control of the moral hazard problem, at the margin, an increase in the post-IPO ownership by insiders allows a reduction in the length of the lockup. The post-IPO level of ownership will
23、 not, however, have a rst order impact on the nature of the pre-IPO asymmetric information problem. Therefore the level of insider ownership and the length of the lockup should be negatively correlated in the cross section of moral hazard rms and uncorrelated in the sample of asymmetric information
24、rms. Our empirical tests require an identication strategy by which rms may be separated based on which of the frictions, moral hazard or asymmetric information, is likely to be the dominant consideration for the length of the lockup provision. One such candidate proxy is rm size. As a rm grows, its
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