Review of Accounting Studies

, Volume 22, Issue 2, pp 873–902 | Cite as

Blockholder exit threats in the presence of private benefits of control

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Abstract

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.

Keywords

Exit theory Private benefits of control Operating performance China Split-share structure reform 

JEL Classification

G30 G34 G32 G31 F30 F23 M41 
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Notes

Acknowledgements

We would like to thank Mahfuz Chy, Alexander Dyck, Vivian Fang (MIT/Asia discussant), Michael Firth, José Miguel Gaspar, Danqi Hu, Michael Iselin (FARS discussant), Yue Li, Ross Lu, Robert Parrino (NFA discussant), Stephen Penman (Editor), Tiago Pinheiro, Francisco Santos, Karin Thorburn, Charles Wang (AAA discussant), Jingjing Wang, Maria Wieczynska (IAS discussant), two anonymous reviewers, and workshop participants at Norwegian School of Economics (NHH), University of California at Berkeley (Haas doctoral workshop), City University of Hong Kong, 2015 Financial Accounting and Reporting Section (FARS) Midyear Meeting, 2015 International Accounting Section (IAS) Midyear Meeting, Rotman School of Management (and Rotman doctoral workshop participants), University of Auckland, Tsinghua University, Peking University, University of Kentucky, 2015 Annual Congress of the European Accounting Association, McMaster Accounting Research Conference, Santa Clara University, 2015 CAAA Annual Meeting, 2015 MIT/Asia, 2015 AAA Annual Meeting, and the NFA 2015 Conference for valuable comments. Hope gratefully acknowledges the financial support of the Deloitte Professorship.

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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Rotman School of Management, University of TorontoTorontoCanada
  2. 2.BI Norwegian School of ManagementOsloNorway
  3. 3.Department of Accounting and Management ControlHEC ParisParisFrance

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