Institutional Blockholder Exit Threats and Corporate Social (Ir)responsibility

Abstract

Institutional blockholders, who have incentives to gather private information and sell their shares when managers underperform, exert governance through exit threats. Hence, managers align their actions with shareholders’ interests to dissuade blockholders from selling. We find that as exit threats increase, firms reduce not only social irresponsibility (CSI), but also social responsibility (CSR), implying that CSI and CSR are independent actions that both reflect agency problems rather than firm value enhancement. Furthermore, consistent with exit theory, the negative impact of exit threats on CSI and CSR increase as managerial wealth is sensitive to stock price, the firm is cash-rich (more susceptible to “bad” agency problems), and following Schedule 13G filings that indicate blockholders’ intent to remain passive (exert governance through exit threats only). We contribute to research on corporate social (ir)responsibility and the role of blockholders in disciplining both CSR and CSI that may not be in the shareholders’ interests.