The role of mandatory lockup ratios in initial public offerings

• Published date: 01 December 2022
• Author: Rasidah Mohd‐Rashid,Ruzita Abdul‐Rahim,Karren Lee‐Hwei Khaw,Waqas Mehmood
• Date: 01 December 2022
• DOI: http://doi.org/10.1002/pa.2781

RESEARCH ARTICLE

The role of mandatory lockup ratios in initial public offerings

Rasidah Mohd-Rashid

1

| Ruzita Abdul-Rahim

2

| Karren Lee-Hwei Khaw

3

|

Waqas Mehmood

1

1

School of Economic, Finance and Banking,

Universiti Utara Malaysia, Sintok, Kedah,

Malaysia

2

Faculty of Economics and Management,

Universiti Kebangsaan Malaysia, Bangi,

Selangor, Malaysia

3

University of Waikato, The University of

Wakaito Joint Institute at Zhejiang, University

City College, Hangzhou, China

Correspondence

Rasidah Mohd-Rashid, School of Economic,

Finance and Banking, Universiti Utara

Malaysia, 06010 Sintok, Kedah, Malaysia.

Email: m.rasidah@uum.edu.my

Funding information

Fundamental Research Grant Scheme, Grant/

Award Numbers: (FRGS/1/2018/SS01/

UUM/02/7) (S/O Code, 14203)

This paper examines the potential explanations for Initial Public Offering (IPO) lockup

provisions. This study uses cross-sectional regression, robust least squares, and qua-

ntile regression on data for the period from 2000 to 2014. We explore the explana-

tion of lockup as (i) a signal of firms' commitment to alleviate the moral hazard

problem, or (ii) a signal of firms' qualities. The results document that firms retain

higher proportions of their shares as a signal of commitment rather than quality.

Besides that, firms with higher lockup ratios are more likely to engage high-quality

underwriters for their listing exercise. The findings suggest that although the regula-

tion requires major shareholders to lockup their entire shareholdings until 6 months

after the IPO listing, they tend to keep higher proportions than the minimum require-

ment of 45% of the enlarged issued and paid up capital as a signal of commitment

towards reducing the moral hazard problem. Thus, investors should recognise the sig-

nalling role of the lockup provision when they make investment decisions.

Policymakers need to pay attention to the formulation of lockup provisions. While

lockup is mandatory, the different percentages of shares locked up are of interest to

this study. Further, the findings highlight the importance of lockup provisions in boo-

sting the confidence of investors to participate in IPOs. This study provides new

empirical evidence regarding the role of the lockup provision.

KEYWORDS

commitment, information asymmetry, initial public offerings, lockup, shareholder retention

1|INTRODUCTION

A lockup provision arises when the regulators prohibit major share-

holders from selling a specific portion of their shares for a specified

duration following an Initial Public Offering (IPO) exercise. This period

is known as the “lockup period”, and the date the shareholders are

allowed to sell their shares is referred to as the “lockup expiry date”.

Data on the lockup period is difficult to collect in the UK, unlike in the

US where it is compulsory to publish the data during the IPO listing.

In both countries, the lockup agreement involves negotiations

between the issuers and underwriters. In contrast, in Malaysia, the

Malaysian Securities Commission (SC) has published a guideline

requiring all firms going for listing to comply with the lockup provision

regulations. In Malaysia, the lockup provision is termed as the “share

moratorium”and the information related to it is published in the pro-

spectus, but a proper understanding of the share moratorium informa-

tion is still lacking among investors.

In 1995, the SC allowed all firms in the construction, services, or

specialised activities sector that were seeking listing on the Second

Board or Main Board of Bursa Malaysia to choose between (1) provid-

ing a profit guarantee of 90% of the forecasted profit and maintaining

annual profits of 90% for the following 2 years after listing; or (2) a

share moratorium of the entire shares held by the substantial share-

holders and promoters. Subsequently, the profit guarantee option was

dispensed with in May 1999. At the same time, firms aiming to be

listed on the Main Board were required to maintain a minimum lockup

ratio of 45% of the enlarged issued and paid up capital, and promoters

of MESDAQ (Malaysian Exchange of Securities Dealing and

Received: 17 May 2021 Revised: 6 October 2021 Accepted: 7 October 2021

DOI: 10.1002/pa.2781

J Public Affairs. 2022;22(Suppl. 1):e2781. wileyonlinelibrary.com/journal/pa © 2021 John Wiley & Sons Ltd. 1of11

https://doi.org/10.1002/pa.2781