The Role of Lockups in Stock Mergers

Abstract

We document the frequent use of stock lockup agreements in mergers and acquisitions (M&As) paid in stock and examine the corporate determinants and consequences of lockups’ use and duration. Lockup agreements prohibit target shareholders from selling shares issued by the acquirer as means of payment for a pre-specified period. We find support for the hypothesis that target shareholders agree to lockups to pre-commit to hold on to the acquirer’s stock if they believe the merger’s long-term fundamentals are strong. Consistent with our hypothesis, lockups come with larger acquirer announcement returns, particularly when acquirer valuations are high; ex-ante, lockups adoption likelihood increases with acquirers’ valuation. Lockups also come with higher deal completion likelihood; shorter merger negotiations; higher long-term operating performance. We conclude the market interprets lockups as a signal of strong fundamentals, particularly when acquirers’ valuations are high.