Signaling in New Ventures : The Use and Impact of the Lockup Period at the Time of the Initial Public Offering

The lockup period is an agreement by the current owners of a new venture to not sell or dispose of their shares without the approval of the investment banker underwriting the shares of the initial public offering (IPO). We investigated the lockup period of a sample of 313 new ventures going through the IPO and find that a longer lockup period acts as a substitute signal to VC and prestigious underwriter backing. Furthermore, we find that ventures which have a going concern issue can reduce the amount of underpricing at the time of the IPO by enduring a longer lockup period