IPO lockups, founder power, and executive compensation

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.

Citation

He, L. and Wan, H. (2013), "IPO lockups, founder power, and executive compensation", International Journal of Managerial Finance, Vol. 9 No. 4, pp. 314-331. https://doi.org/10.1108/IJMF-10-2012-0111