American Accounting Association 2006 Midwest Region Meeting March 30 – April 1 Chicago, Illinois

Saturday, April 1, 11:00 a.m. to 12:50 p.m.
Concurrent session 6B - Disclosure and Intangible Assets (Financial Accounting and Reporting)

Title: Voluntary Disclosure Strategy around Lockup Expirations: Evidence from Management Forecasts

Yonca Ertimur Stanford University	Jayanthi Sunder Northwestern University
Ewa Sletten Northwestern University

ABSTRACT: We study the voluntary disclosure strategy of IPO firms during the lockup period and the four quarters following the lockup expiration date.  Lockup expiration marks a sudden shift in trading incentives and litigation risk and therefore we examine the impact of ex ante insider selling incentives on the propensity and bias in management forecasts. We also examine if firms use the lockup period to build a reputation for timely and credible forecasting. We find that firms delay bad news disclosures around lockup expiration and bias their forecasts more when trading incentives are present. We therefore conclude that firms strategically choose disclosures in response to trading incentives and litigation risk. We also find limited evidence that firms use the lockup period to build credibility for future disclosures. Finally we show that the market anticipates the bias from trading incentives and penalizes the firm but does not fully comprehend the external pressures on the firm from venture capitalists and underwriters to bias forecasts optimistically.

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