Research On The Effects And The Paths To Corporate Governance Of Non-Controlling Blockholders’ Exit Threats

With the successive liberalizations of margin trading business,the stock liquidity in Chinese capital market continues to improve.Hence,the exit of blockholders become more convenient.At the mean time,with the updated regulations of blockholder exits made by China Securities Regulatory Commission(CSRC),the environment of blockholder exits has being optimized.Under this background,it is important to explore the impact of the exit threats of noncontrolling blockholders on corporate governance owing to the importance of noncontrolling blockholders as well as the low possibility of controlling blockholders’ exit threats.On the one hand,China has a capital market characterized by prevalence of high ownership concentration(Feng,2001;Feng et al.,2002;Jiang and Kim,2020).Therefore,the corporate governance method of non-controlling blockholders may be different from that of controlling blockholders.Owing to the high agency cost of voice and the interests’ conflict with the controlling blockholders,the noncontrolling blockholders are more likely to use exit threats for corporate governance.On the other hand,poor corporate governance is a key factor hindering the corporate development and even the national economy(Gul et al.,2010;Syverson,2011).Therefore,how do exit threats of non-controlling blockholders affect corporate governance? Based on the principal agent theory,the information theory as well as the incentive theory,this paper deeply explores how the exit threats of noncontrolling blockholders affect corporate governance.Specifically,we study how the exit threats of non-controlling blockholders affect the corporate operating performance(firm-level),the private benefits of control(controlling blockholderlevel)as well as managerial ability(management-level).The main research contents in this paper as well as major conclusions from the test results are as follows:The first chapter is our introduction,which includes the research topic background,research purpose and significance,research design and structural arrangements,research methodologies,as well as contributions of the whole paper.The second chapter illustrates the three main theories involved in this paper,including the principal agent theory,the information theory as well as the incentive theory.The third chapter is our review of previous literature,which mainly reviews four aspects of relevant literature:(1)Definition of blockholders and noncontrolling blockholders;(2)The corporate governance role of non-controlling blockholders;(3)The corporate governance method of non-controlling blockholders,including voice and exit threats;(4)The impact of exit threats,including agency cost,financial reporting quality,earnings management and investment efficiency.The fourth chapter discusses the impact of exit threats of non-controlling blockholders on corporate operating performance(firm-level).We find that:(1)Exit threats make a positive influence on corporate operating performance;(2)Exit threats owing to blockholders’ financial arrangements are less effective to improve the corporate operating performance than those owing to business development arrangements.Moreover,exit threats of non-controlling blockholders are larger in those credible exit threats;(3)Exit threats will be discounted to improve corporate operating performance after the first credible exit threats;(4)For firms with more serious agency problem,more blockholders and higher manager-wealth sensitivity to stock prices,the exit threats are more effective in corporate operating performance.Finally,the above conclusions are robust to a series of endogenous analysis and robustness test.The fifth chapter analyzes the impact of exit threats of non-controlling blockholders on private benefits of control(controlling blockholder-level).The results show that:(1)Exit threats can significantly restrain the private benefits of control;(2)Exit threats owing to blockholders’ financial arrangements are less effective to restrain the private benefits of control than those owing to business development arrangements.Moreover,exit threats of non-controlling blockholders are larger in those credible exit threats;(3)Exit threats will be discounted to restrain the private benefits of control after the first credible exit threats;(4)For firms with worse environment of audit supervision,higher concentration of shareholders’ wealth and less affiliated managements,the exit threats of non-controlling blockholders are more effective to reduce the private benefits of control.Finally,the above conclusions are robust to endogenous analysis and robustness tests.The sixth chapter explores the impact of exit threats of non-controlling blockholders on managerial ability(management-level).We find that:(1)Exit threats can improve the managerial ability,(2)The management can only infer the attitude of blockholders towards to the corporate development based on the reason of blockholders exit plans,but can not distinguish the credibility of the exit threats.As long as the exit reason is not due to blockholders’ financial arrangements,the exit threats will have a positive effect on the managerial ability,(3)Different from the results of above chapters,exit threats will be strengthened to improve managerial ability after the first credible exit threats,(4)The exit threats of non-controlling blockholders may affect the managerial ability through the management’s monetary compensation,non-monetary private benefits and reputation.Finally,the above conclusions are robust to a series of endogenous analysis and robustness test.The seventh chapter is our conclusions of this paper,as well as our suggestions and prospects.This paper makes several contributions in the following five aspects:First,based on the heterogeneity of exit threats,this paper studies the different effects of different exit threats types on corporate governance,which enriches the previous research on exit threats.Previous literatures only study the impact of the blockholders’ exit threats on corporate governance(Edmans and Manso,2011;Edmans et al.,2013;Edmans,2014;Hope et al.,2017;Dou et al.,2018;Chen,2019;Chen et al.,2021;Yu et al.,2021),but they do not illustrate what degree the exit threats have been materialized and can not tell the different results between different types of exit threats in the role of corporate governance.We distinguish the reasons,credibility and timeliness of exit threats,and find that different types of exit threats have different effects on the corporate operating performance,the private benefits of control as well as managerial ability.This paper not only enriches the relevant research on the governance mechanism of exit threats,but also helps investors to predict the real motivation of exit plans.Second,the corporate operating performance is directly related to the interests of shareholders,managements and investors.It is an important consideration to reflect the level of corporate governance(Wei et al.,2007;Han et al.,2015).Therefore,it is of important practical significance to study the impact of exit threats on corporate operating performance.Within the scope of our search,there are few literatures directly focusing on this topic.From the view of the firm,this paper explores the impact of exit threats on corporate operating performance.We further do a research about the possible impact mechanism of exit threats and provide a feasible and beneficial perspective for the effectiveness of exit threats.Third,as an important research topic in the field of corporate governance,the private benefits of controlling shareholders are related to the interests of noncontrolling blockholders and small investors.There are few literatures to explore the impact on the private benefits of control from the perspective of exit threats.We improve the measurement method of exit threats in the research of Jiang et al.(2015)and Hope et al.(2017),giving a more accurately and robust result to verify that the exit threats of non-controlling blockholders can restrain the controlling blockholders’ private benefits of control.Moreover,we test the impact mechanism of exit threats on the private benefits of control.Hence,our paper provides a more accurate and comprehensive direction to reduce the private benefits of control and strengthen the protection of small investors.Fourth,this paper innovatively studies the impact of exit threats of noncontrolling blockholders on managerial ability.It not only enriches the previous research on the exit threats,but also expands the possible path of improving the governance effect of managerial ability.However,there is no literature directly exploring this area.Therefore,our research is innovative.Last,based on the study that the exit threats can improve the managerial ability,this paper further explores the intermediary channel of this incentive method based on the incentive theory.We find that the monetary compensation,non-monetary private benefits and management reputation can play an intermediary role to improve the managerial ability when managers is facing with exit threats.Previous literatures have not been involved in this intermediary effect.Hence,our findings not only explain how the exit threats improve the managerial ability in theory,but also provide a micro basis for the incentive path of managerial ability of Chinese listed companies in practice.