Blockholders and corporate governance: evidence from China’s split-share-structure reform

Purpose - Proper empirical tests of the effect of blockholders’ monitoring incentives on corporate governance are scant in the literature because the relationship between ownership structure and enforcement of corporate governance mechanisms is bidirectional. This study aims to address the endogeneity issue by examining the effect of blockholding on executive turnover–performance sensitivity, using the split-share-structure (SSS) reform in China as an exogenous shock to blockholders’ monitoring incentives. Design/methodology/approach - This study uses a logit model for estimating the change in executive turnover–performance sensitivity around the SSS reform. Sub-sample analysis is conducted to examine whether the impact of SSS reform on the turnover-performance sensitivity is stronger for firms with more contestable blockholders who might consider stock liquidity, risk sharing and diversification in their monitoring/trading decisions. Findings - Top executive turnover, defined as CEO or board chair turnover, becomes less sensitive to firm operating performance after the reform, mainly for firms with contestable blockholders prior to the reform. Stock liquidity and blockholders’ demand for diversification can explain the impact of contestable blockholding. Moreover, blockholding is sensitive to firm operating performance after the reform but not before it. Originality/value - With few exceptions, most studies in the blockholding literature focus on the effect of blockholder monitoring on firm value. Examining an exogenous shock to blockholding, this paper provides a set of new evidence for the impact of blockholding on executive turnover–performance sensitivity. The results call for more evidence of the impact of blockholding on executive turnover from other markets.