Information content of lock-up provisions in initial public offerings Nancy J. Mohan*, Carl R. Chen Department of Economics and Finance, University of Dayton, 300 College Park Drive, Dayton, OH 45469-2251, USA Received 30 December 1999; revised 30 April 2000; accepted 10 July 2000 Abstract An overwhelmingly large proportion of initial public offerings (IPOs) report lock-up provisions that prohibit existing stockholders from selling their shares within a specified period after the offering date. These lock-up periods may last as long as 3 years. Because influential buyers request the lock-up, we conjecture that the length conveys credible information pertinent to the risk of the IPO. Analyzing 729 IPOs from January 1990 to December 1992, we found that the lock-up period signals the issuer's riskiness and that a 180-day lock-up period seems to be the norm. Any departure from the norm suggests more uncertainty about a firm's value and thus results in deeper IPO underpricing as well as a larger underwriter spread. We also found that thin-trading activity occurring shortly after the expiration of the lock-up period is perceived by the market as good news, while heavy trading is regarded as bad news. D 2001 Elsevier Science Inc. All rights reserved. JEL classification: G24; G30 Keywords: Initial public offerings; Lock-up period 1. Introduction There are various restrictions on the sale of a company's shares around the initial public offering (IPO) date. For example, NASD limits sales by venture capitalists who have made a private investment in the issuer (90 days) and underwriters who receive shares of the issuer as * Corresponding author. Tel.: +1-937-229-2458; fax: +1-937-229-2477. E-mail address: mohan@udayton.edu (N.J. Mohan). International Review of Economics and Finance 10 (2001) 41±59 1059-0560/01/$ ± see front matter D 2001 Elsevier Science Inc. All rights reserved. PII:S1059-0560(00)00070-8