Blockholder Exit Threats in the Presence of Private Benefits of Control: A Quasi-Experiment from China's Split-Share Structure Reform

Exit theory predicts a governance role of non-managerial blockholders’ exit threats; but this role could be ineffective if the managers’ potential private benefits exceed their loss in stock-price declines caused by non-managerial 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 non-managerial blockholders to exit. Using a difference-in-differences design combined with propensity-score matching, we find that firms whose non-managerial blockholders experience an increase in exit threat have a greater improvement in performance than those whose non-managerial blockholders experience no increase. The improvement is as much as 37.2% of the average pre-SSSR treatment sample operating performance. Moreover, the governance effect of exit threats becomes 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 non-managerial blockholder intervention or some well-known intended effects of SSSR.