A Signaling or Commitment Device? The Role of Voluntary IPO Lockup in China's Stock Market

The literature suggests that voluntary IPO lockups (thereafter lockups) have both roles as a commitment device to control moral hazard and a signaling device to minimize asymmetric information. Using a hand collected data on lockups in China from 2006 to 2012, this paper disentangles the two channels and shows that lockups reduce IPO underpricing via the latter, and boost long-run stock returns via the former. The paper utilizes firms' state-owned status, a unique feature of China's stock market, to identify the dominant channel at work. State-owned status does not signal firm quality and thereby does not change the extent to which lockups reduce asymmetric information. By contrast, state-owned firms have superior access to resources and subsidies, reducing the extent to which managerial efforts drive long-run profitability, and thus limiting the effect of lockups in reducing moral hazard. The result also suggests that partial lockups tend to be more effective in signaling firm quality, while full lockups more effective as a commitment device