Events

Finance Seminar

Authors:

• Sreedhar Bharath
  Arizona State University

• Venky Nagar
  University of Michigan

• Sudarshan Jayaraman
  Washington University

Recent theory posits a new governance channel available to blockholders: threat of exit. The threat of exit, as opposed to actual exit, is difficult to measure directly. However, a crucial property is that the threat of exit is weaker when stock liquidity is lower and vice versa. We use natural experiments of financial crises and decimalization as exogenous shocks to stock liquidity. Firms with larger blockholdings experience greater declines in firm value during these crises periods (and increases during decimalization), particularly if the manager's wealth is more sensitive to the stock price and thus to the threat of exit. Additional tests show exit threats to be distinct from blockholder intervention.