Exit as Governance: An Empirical Analysis





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    • Sreedhar T. Bharath is with Arizona State University, Tempe; Sudarshan Jayaraman is with Washington University in St. Louis; and Venky Nagar is with the University of Michigan. We are especially grateful to main reviewer, whose contribution to improving the paper was significant and substantial. We are also grateful to Editor Campbell Harvey, the Associate Editor, and a final-stage advisory reviewer for their detailed suggestions. In addition, we thank Anat Admati, Yakov Amihud, Alex Edmans, and workshop participants and discussants at Emory University, the GIA conference hosted by the University of North Carolina at Chapel Hill, Indian School of Business, Journal of Accounting, Auditing and Finance annual conference, Stanford University, the Western Finance Association annual meeting, University of Alabama, University of Michigan, the Utah Winter Accounting conferences, and Washington University. All errors remain our own.


Recent theory posits a new governance channel available to blockholders: threat of exit. Threat of exit, as opposed to actual exit, is difficult to measure directly. However, a crucial property is that it 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 (increases) in firm value during the crises (decimalization), particularly if the manager's wealth is sensitive to the stock price and thus to exit threats. Additional tests suggest exit threats are distinct from blockholder intervention.