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IPO lockups, founder power, and executive compensation

Author

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  • Lerong He
  • Hong Wan

Abstract

Purpose - – The purpose of this paper is to examine the relationship between IPO lockups and founder-CEOs’ compensation and incentives in newly public firms. The paper argues that existence and length of lockup agreements are affected by bargaining power of founders, which will consequently influence the determination of their compensation contracts. Design/methodology/approach - – Multivariate tests are constructed to examine the relationship between IPO lockups and executive compensation. OLS, fixed-effect panel data model, and the Heckman two-stage model are all utilized to conduct the tests. Findings - – The study finds that lockup existence and lockup length are negatively related to founder-CEOs’ total compensation and positively related to founder-CEOs’ equity incentives. The results hold after controlling for the endogenous decision to sign a lockup agreement at the IPO. Research limitation/implications - – The paper's results suggest that the power of founders and other insiders is a crucial factor in the lockup determination process besides economic factors identified in previous studies. The paper's results also echo the political power theory in the management literature which suggests that an organization's decision making is heavily influenced by relative power of organizational members and reflects their preference. Originality/value - – The paper raises a new explanation for the determinant of IPO lockups that supplements the extant theories. The paper argues that existence and length of lockup agreements could be affected by bargaining power of insiders.

Suggested Citation

  • Lerong He & Hong Wan, 2013. "IPO lockups, founder power, and executive compensation," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 9(4), pages 314-331, September.
    • Handle: RePEc:eme:ijmfpp:v:9:y:2013:i:4:p:314-331
    DOI: 10.1108/IJMF-10-2012-0111
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    Citations

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    Cited by:

    1. Ramit Anand & Balwinder Singh, 2019. "Do Firm- and Board-specific Characteristics Corroborate Underpricing? A Study on the Indian IPOs," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 44(1), pages 86-102, February.
    2. David R. Williams & Betty S. Coffey & Carlton C. Young, 2018. "Human capital and agency effects on CEO compensation of IPO biopharmaceutical firms and the market’s response," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(2), pages 315-337, June.
    3. Ramit Anand & Balwinder Singh, 2019. "Effect of Composition of Board and Promoter Group Retained Ownership on Underpricing of Indian IPO firms: An Empirical Study," Indian Journal of Corporate Governance, , vol. 12(1), pages 21-38, June.
    4. Sahil Narang & Rudra P. Pradhan, 2021. "IPO lock-up: a review and assessment," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 48(3), pages 343-369, September.

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