Blockholder Exit Threats in the Presence of Private Benefits of Control

50 Pages Posted: 4 Mar 2015 Last revised: 5 Dec 2016

See all articles by Ole-Kristian Hope

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Han Wu

HEC Paris

Wuyang Zhao

University of Texas at Austin

Date Written: December 1, 2016

Abstract

Exit theory predicts a governance role of outside blockholders’ exit threats; but this role could be ineffective if managers’ potential private benefits exceed their loss in stock-price declines caused by outside blockholders’ exit. We test this prediction using the Split-Share Structure Reform (SSSR) in China, which provided a large, exogenous, and permanent shock to the cost for outside blockholders to exit. Using a difference-in-differences design combined with propensity-score matching, we find that firms whose outside blockholders experience an increase in exit threats have a greater improvement in performance than those whose outside blockholders experience no increase. Moreover, the governance effect of exit threats is ineffective in the group of firms with the highest concern for private benefits of control. Finally, a battery of theory-motivated tests show that the documented effects are unlikely explained by outside blockholder intervention or some well-known intended effects of SSSR.

Keywords: Exit-Threat Theory, Private Benefits of Control, Liquidity, China, Split-Share Structure Reform, Operating Performance, Quasi-Experiment

JEL Classification: G30, G34, G32, G31, F30, F23, M41

Suggested Citation

Hope, Ole-Kristian and Wu, Han and Zhao, Wuyang, Blockholder Exit Threats in the Presence of Private Benefits of Control (December 1, 2016). Review of Accounting Studies, Forthcoming; Rotman School of Management Working Paper No. 2572724; HEC Paris Research Paper No. ACC-2016-1180. Available at SSRN: https://ssrn.com/abstract=2572724 or http://dx.doi.org/10.2139/ssrn.2572724

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Han Wu

HEC Paris ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Wuyang Zhao

University of Texas at Austin ( email )

Austin, TX 78712
United States
5128262698 (Phone)

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