Publication
Blockholder exit threats in the presence of private benefits of control
2017, Review of Accounting Studies, 22(2), pp.873-902
Résumé
Exit theory predicts a governance role for outside blockholders’ exit threats, but this role could be ineffective if managers’ potential private benefits exceed their loss in stock-price declines caused by the blockholders’ exits. 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. We find that firms whose outside blockholders experience an increase in exit threats improve performance more than those whose outside blockholders experience no increase. The governance effect of exit threats also is ineffective in the group of firms with the highest concern for private benefits of control. Finally, a battery of theory-motivated tests shows that the documented effects are unlikely explained by outside blockholder intervention or some well-known intended effects of SSSR.