An important recent theoretical literature argues that the threat of exit can represent an effective form of governance when the blockholder is a principal. However, a significant fraction of equity blocks is held by delegated portfolio managers. How do agency frictions arising from the delegation of portfolio management affect the ability of blockholders to govern via the threat of exit? We show that when blockholders are sufficiently career concerned exit will fail as a disciplining device. Our results have testable implications on the relative degree to which different classes of delegated portfolio managers use exit as a form of governance.
This discussion paper won a Paul Woolley Centre discussion paper prize.