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Blockholder exit threats and corporate cash holdings

Lingna Sun, Hieu V. Phan and Thuy Simpson

The Financial Review, 2021, vol. 56, issue 4, 821-843

Abstract: We investigate the effects of blockholder exit threats, which increase with stock liquidity, on corporate cash holdings and the value of cash to shareholders. Exploiting decimalization as an exogenous shock to stock liquidity to identify the effects of blockholder exit threats, we find robust evidence that blockholder exit threats have a negative effect on corporate cash holdings and a positive effect on the value of cash to shareholders. Further analysis indicates that exit threat induces firms to increase stock repurchases and improve investment efficiency. Our evidence is consistent with the view that blockholder exit threats are an effective corporate governance mechanism.

Date: 2021
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Handle: RePEc:bla:finrev:v:56:y:2021:i:4:p:821-843