Does minority shareholder activism reduce stock idiosyncratic risk?

Using the China Securities Investors Services Center (CSISC) shareholding as an exogenous shock, this study investigates the impact of minority shareholder activism on idiosyncratic risk. The results show that minority shareholder activism reduces idiosyncratic risk. Firms with lower conditional accounting conservatism, a lower ratio of shares held by institutional investors, or a larger ratio of shares held by managers experience a greater reduction in idiosyncratic risk after the CSISC shareholding. It suggests that minority shareholder activism has a governance effect on constraining insiders’ information management behavior and improving information disclosure, through which idiosyncratic risk decreases. Furthermore, the idiosyncratic risk decreases after the CSISC exercises its rights by attending shareholder meetings. The difference in idiosyncratic risk between firms vanishes after the shareholding pilot program expands to the entire capital market. Finally, we find that the CSISC has a demonstration effect on encouraging other minority shareholders to participate in shareholder meetings.