The Role of Lockups in Stock Mergers

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 the use and duration of lockups. Lockup agreements prohibit target shareholders from selling shares issued by the acquirer as a means of payment for a prespecified period. We find support for the hypothesis that target shareholders agree to lockups to precommit 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, lockup adoption likelihood increases with acquirers’ valuation. Lockups also come with higher deal completion likelihood, shorter merger negotiations, and higher long-term operating performance. We conclude the market interprets lockups as a signal of strong fundamentals, particularly when acquirers’ valuations are high. This paper was accepted by Bo Becker, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.00993 .