Blockholder exit threats and management tone manipulation: evidence from China

Purpose This study empirically examines the relationship between the blockholder exit threats (ETs) and management tone manipulation, based on two competing hypotheses: the “governance hypothesis” and the “market pressure hypothesis.” The study aims to explore the impact and mechanisms of ETs on the quality of textual information disclosure. Design/methodology/approach This study uses ordinary least squares multivariate regressions on panel data from Chinese A-share listed companies spanning 2007 to 2022. Building on Huang et al. (2014), we construct a benchmark model of managerial tone and use its residuals to measure abnormal positive tone. Blockholder exit threat (ET), following Dou et al. (2018), is proxied by the interaction between stock liquidity and blockholder competition. To address endogeneity, we employ propensity score matching, the Heckman two-stage method and lagged models. Robustness checks include alternative variable definitions and different textual dictionaries. Findings The results show that external blockholder ETs significantly increase the degree of abnormal positive managerial tone, thereby supporting the market pressure hypothesis. Further analyses reveal that the positive association between ETs and abnormal positive tone is stronger in subsamples where managerial market pressure is higher, the level of blockholder expropriation is greater and insider trading is more prevalent – indicating a stronger collusion motive between external blockholders and management. Mechanism tests show that ETs manipulate managerial tone by increasing the sensitivity of managerial wealth to share price fluctuations. Research limitations/implications This study is limited to Chinese A-share listed companies, whose unique institutional and regulatory environment may restrict the generalizability of the findings to other markets. Differences in disclosure rules, legal enforcement and investor protection between China and developed economies suggest that the identified mechanisms may not apply universally. Additionally, our reliance on annual report narratives for measuring managerial tone may overlook other communication channels. Future research could extend the analysis to other market segments or countries and incorporate additional data sources to test the robustness and broader applicability of our conclusions. Practical implications The results highlight the need for enhanced regulatory oversight of narrative disclosures to prevent managerial “window dressing” and mitigate information asymmetry. Regulators should strengthen cross-validation between financial and non-financial information and promote mechanisms that increase the cost and risk of blockholder–management collusion. Investors are advised to critically assess managerial tone and remain alert to overly optimistic language. Additionally, increased supervision of tunneling and insider trading, along with stronger legal protections for minority shareholders, is essential for fostering transparency and integrity in China’s capital markets and improving overall market quality. Originality/value This paper contributes to understanding the impact of external blockholder ETs on managerial tone manipulation in narrative disclosures from the perspective of ownership structure in China’s unique institutional environment. The findings of the study provide new insights into the governance role of blockholders and offer policy implications for improving information transparency and the healthy development of emerging capital markets.