Voting with their feet: Controlling shareholders' share pledging and other major shareholders' strategic response*

This paper investigates whether and why other major shareholders "vote with their feet" when confronted with agency conflicts among shareholders by examining their stock selling behaviors after controlling shareholders pledge their shares. Using a sample of listed Chinese firms from 2007 to 2020, we find that when controlling shareholders increase their pledging, both the number of share selling transactions and the stock values sold by other major shareholders in-crease. This relation is stronger when a firm has a higher level of liquidity, more large share-holders, greater contestability of other major shareholders, and a higher information asymmetry, supporting the "exit" theory. Our findings imply that selling shares is a strategic response by other major shareholders to controlling shareholders' pledging. On the other hand, the liquidity and portfolio rebalancing needs or insider trading of other major shareholders are not the driving forces of their selling behaviors in the case of share pledging. We further document that other major shareholders' "exit" has significant economic implications from the perspective of them-selves and the perspective of firms. "Voting with their feet" helps other major shareholders to avoid potential losses and improves firm valuation, profitability, and stock price efficiency.