Tradable Block Ownership, Liquidity and Threat of Exit

Abstract

Large shareholders may affect managerial decisions through the threat of selling their holdings and thereby negatively influencing price. The split-share structure of Chinese corporate ownership imposes restrictions on ownership and shares trading. Using these institutional features, we test the hypothesis that the presence of a blockholder who is potentially able to trade based on private information may help discipline management and improve information disclosures, thereby improving stock liquidity. Our results show that the exit threat is closely associated with shares’ tradability and to the extent that tradable (non-tradable) blockholders can discipline management through exit threats, they exert a positive (negative) liquidity effect through both real and information friction channels. These results are robust to the possible confounding effect of liquidity-induced tradable block ownership, as shown by the difference-in-differences analysis based on the split-share structure reform, which results in an exogenous shock to the level of tradable block shares. There is evidence that the liquidity effect of tradable block ownership displays an inverted U-shape relationship, implying that exit costs rise when more tradable shares are acquired.