Effects of a Long Mandatory Lockup Period on IPOs Underwriting

Abstract

Underwriting is the most common allocation mechanism for IPOs. Despite its diffusion, underwriting suffers from underpricing which is ultimately “money left on the table” that negatively influences the health of a company. For this reason, capital markets have identified some tools to reduce underpricing. The lockup period provision is one of them. Notwithstanding its widespread use during IPOs, lockups are neither regulated nor fixed by any financial authorities. This paper investigates the reasons why financial regulators should make the lockup clause a compulsory requirement for listing and should extend its length further than the current average.