Blockholder Exit Threats in the Presence of Private Benefits of Control
50 Pages Posted: 4 Mar 2015 Last revised: 5 Dec 2016
Date Written: December 1, 2016
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: Suggested Citation