The role of stock liquidity in blockholder governance: Evidence from corporate social responsibility

We use decimalization of the tick size, which exogenously increases stock liquidity and thereby heightens blockholder governance, to identify its effect on corporate social responsibility (CSR). We find that enhanced blockholder governance after decimalization leads to lower excessive CSR performance and higher firm value. Compared to active blockholders, passive blockholders, relying on the threat of selling shares and exiting, drive our results. The inverse relationship between blockholder governance and CSR is more pronounced for firms with poor corporate governance prior to decimalization. Our evidence suggests that blockholder exit threat can serve as a governance device to alleviate agency-driven CSR.