Exit as Governance: An Empirical Analysis

60 Pages Posted: 25 Mar 2010 Last revised: 18 Jun 2012

Sreedhar T. Bharath

Arizona State University - W.P. Carey School of Business

Sudarshan Jayaraman

University of Rochester - Simon Business School

Venky Nagar

University of Michigan, Stephen M. Ross School of Business

Date Written: March 16, 2010

Abstract

Recent theory posits a new governance channel available to blockholders: threat of exit. The threat of exit, as opposed to actual exit, is difficult to measure directly. However, a crucial property is that the threat of exit is weaker when stock liquidity is lower and vice versa. We use natural experiments of financial crises and decimalization as exogenous shocks to stock liquidity. Firms with larger blockholdings experience greater declines in firm value during these crises periods (and increases during decimalization), particularly if the manager’s wealth is more sensitive to the stock price and thus to the threat of exit. Additional tests suggest exit threats are distinct from blockholder intervention.

Keywords: Liquidity, Governance, Natural Experiment, Exit,Decimalization, Russian Crisis, Asian Crisis

JEL Classification: G30,G34

Suggested Citation

Bharath, Sreedhar T. and Jayaraman, Sudarshan and Nagar, Venky, Exit as Governance: An Empirical Analysis (March 16, 2010). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1572940 or http://dx.doi.org/10.2139/ssrn.1572940

Sreedhar T. Bharath (Contact Author)

Arizona State University - W.P. Carey School of Business ( email )

400 E. Lemon Street
Tempe, AZ 85287
United States
347-256-8784 (Phone)

Sudarshan Jayaraman

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Venky Nagar

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-647-3292 (Phone)
734-764-3146 (Fax)

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