A Buy-Side Model of Lockups: Theory and Evidence

80 Pages Posted: 3 Feb 2000

See all articles by John C. Coates, IV

John C. Coates, IV

Harvard Law School; European Corporate Governance Institute (ECGI)

Guhan Subramanian

Harvard Business School

Date Written: January 3, 2000


Lockups are an increasingly important element of M&A deals in the United States. We present, for the first time, descriptive data on lockup incidence, trends, and their relationship with Delaware case law. Prior commentators have argued that lockups should have little or no impact on allocational efficiency in the market for corporate control. We offer a new theoretical model of lockups that includes several "buy-side" distortions, such as agency costs, informational effects, switching costs, reputational effects, and endowment effects for bidders, and show that lockups can in fact change bid outcomes. We find strong support for this "buy-side" model of lockups from a large sample of M&A deals over the past twelve years. We also find that the type, size and structure of lockups affect deal outcomes. These results suggest that courts and corporate boards should scrutinize lockups more closely than prior commentators have advocated.

Suggested Citation

Coates, John C. and Subramanian, Guhan, A Buy-Side Model of Lockups: Theory and Evidence (January 3, 2000). Harvard Law School, Law-Econ Discussion Paper No. 274, Available at SSRN: https://ssrn.com/abstract=204251 or http://dx.doi.org/10.2139/ssrn.204251

John C. Coates

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Guhan Subramanian (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
617-495-9784 (Phone)
617-496-7379 (Fax)

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