The effect of lockup on management earnings forecasts disclosure in French IPOs

Abstract

This study investigates the effect of lockup agreements on management earnings forecasts in initial public offering (IPO) prospectuses. Using a sample of 312 French firms that went public over the period 1997–2016, we find that IPOs with lockup agreements are more likely to disclose conservative earnings forecasts. In particular, we provide evidence that IPOs with more locked-up shares and those selecting longer lockup periods, have more accurate management earnings forecasts. In other words, managers of firms with a higher proportion of shares locked up and longer lockup agreements experience greater costs of non-diversification of idiosyncratic risk. They tend, thus, to provide more conservative and accurate forecasts to prevent costs arising from earnings forecast error. These results are robust to a number of sensitivity tests.

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Notes

  1. 1.

    Autorité des Marchés Financier is the French equivalent of the SEC.

  2. 2.

    We classify the industry of our sample firms using the Campbell (1996) industry classification. When we rerun the regressions by including industry variables, our findings remain qualitatively unchanged.

  3. 3.

    For sake of brevity, we only include LP_LENGHT. Columns 2–4 (Table 9) report the results of regressions using absolute forecast error as the dependent variable. The results remain qualitatively similar when we use LOCKUP_PER as an alternative proxy for the importance of the lockup agreement.

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Correspondence to Narjess Toumi.

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Appendix A: Variable, definitions, and sources

Appendix A: Variable, definitions, and sources

Variable Definition Source
Panel A: dependent variable
FE The forecast errors measured as the difference between forecast earnings and actual earnings, all scaled by total assets AMF website and Authors’ calculation
AFE It reflects the absolute deviation of actual earnings, from forecast earnings As above
Panel B: independent variables
LOCKUP_PER The percentage of shares subject to lockup AMF website and Authors’ calculation
LOCKUP_LENGTH Lockup length in months As above
SIZE
HORIZON
The natural logarithm of the total assets in thousand of euros during the forecast period
The number of months between the date of issue of the prospectus and the first post-listing year-end date
Worldscope
AMF website and Authors’ calculation
LNAGE The natural logarithm of the number of years since establishment As above
LEVERAGE
OWNERSHIP
Financial leverage measured as total liabilities over total assets
The capital retained by insiders measured as one minus the percentage of shares raised to the total outstanding shares
Worldscope
AMF website and Authors’ calculation
NM A dummy variable set to one if the firm’s IPO is on the Nouveau Marché, and zero otherwise As above

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Allaya, M., Toumi, N. The effect of lockup on management earnings forecasts disclosure in French IPOs. J Manag Gov 24, 507–529 (2020). https://doi.org/10.1007/s10997-019-09477-x

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Keywords

  • Lockup
  • Initial public offerings
  • Management earnings forecasts
  • France