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Large shareholders and value creation through corporate acquisitions in Europe. The identity of the controlling shareholder matters
Abstract
We investigate whether and how major shareholders influence M&A wealth effects for listed acquirers in Europe. To that end, we examine 342 intra-European takeovers of listed target firms announced between 1997 and 2007. We find that family-controlled acquiring firms on average engage in deals with substantially larger value creation, particularly in Continental Europe. However, this positive family effect disappears in industry-diversifying acquisitions, consistent with the idea that those family-controlled firms may also pursue corporate diversification through M&As in order to diversify the family wealth. Moreover, family owners across Europe cannot curb low-value acquisitions driven by managerial overconfidence. We relate this finding to the strong connections of family owners with management in family-controlled firms. Next, large institutional shareholders all over Europe are associated with the lowest-value deals, but they are able to limit the negative effects of managerial overconfidence. As to the division of M&A gains, we find that regardless of their identity, large acquirer shareholders tend to put their firm in a weaker negotiation position. Lastly, we find no robust support for the idea that major owners are less likely to pursue private benefits through M&As in countries with stronger investor protection.
... Distinguishing among the sample countries is important in M&A research, because the legal environments and corporate governance vary greatly from area to area. It is rather surprising that only nine studies (Achleitner et al., 2010;André et al., 2014;Bae et al., 2002;Ben-Amar and André, 2006;Craninckx and Huyghebaert, 2015;Feito-Ruiz and Menéndez-Requejo, 2010;Franks et al., 2012;Huang et al., 2014;Song and Rath, 2010) consider the influence of the legal environment and the national corporate governance system, despite it having an influence on performance. The characterization of weaker and stronger shareholder protection systems is traditionally based on the divergence between common law and civil law systems. ...
... However, Song and Rath (2010) find that the expropriation effect is not as strong in Malaysian family businesses as in other East Asian economies, such as in Korea (Bae et al., 2002). In this vein, Craninckx and Huyghebaert (2015) argue that the external corporate governance regime does not succeed in protecting investors, as is assumed in the literature. They find that large family-controlled acquirers engage in valuecreating acquisitions in non-diversifying deals, but only in Continental Europe. ...
... A few studies suggest better abnormal returns for family firms, as well as better shareholder value creation after an M&A deal (e.g. André et al., 2014;Ben-Amar and André, 2006;Basu et al., 2009;Feito-Ruiz and Menéndez-Requejo, 2010;Bouzgarrou and Navatte, 2013), except when they engage in diversifying acquisitions (Craninckx and Huyghebaert, 2015). In contrast, others find that family businesses destroy value when acquiring another firm (Bauguess and Stegemoller, 2008;Gleason et al., 2014;Leepsa and Mishra, 2013), benefit less from acquisitions (Shim and Okamuro, 2011), and that family control has a negative effect on the market value, in comparison with the case of non-family firms (Wong et al., 2010). ...
Purpose – The purpose of this paper is to examine the current state of literature concerning mergers and
acquisitions (M&A) in family businesses and to highlight areas for future research.
Design/methodology/approach – This literature review systematically analyses the findings of 41 journal
articles on M&A in family businesses, identifying key thematic categories according to the main topics
of the studies.
Findings – This study finds that it is important to distinguish and examine the type of governance, such as
family and non-family, when studying M&A issues, because their distinctive features influence their strategic
choices, business goals, and, thus, M&A behavior. Three topic areas are identified in existing research: M&A
propensity, process, and performance. Furthermore, methodological and definitional issues regarding the
findings are discussed.
Research limitations/implications – The findings imply that owing to their idiosyncratic nature, the use
of alternative theoretical frameworks in addition to agency theory is encouraged in future studies in order to
better capture the nature of family businesses. In general, further research on M&A issues in family business
settings is needed, especially in the pre-merger phase, which is crucial to M&A performance.
Social implications – Overlooking particular issues that may arise in the context of transactions involving
family businesses may lead to problems in M&A processes. Recognizing the importance of these issues in
such transactions has important value for practitioners supporting family businesses in M&A processes.
Originality/value – This study takes the first step in analyzing the literature on M&A in family businesses,
establishing linkages between family business, corporate governance, and financial management literature,
and structuring the existing research to highlight opportunities with relevance for both theory and practice.
... Thus, acquisitions can be used as a way to reduce financial distress or increase the survival of the family firm. Most research support this argument as family firms are often found to outperform non-family firms in acquisitions (André et al., 2014;Ben-Amar & André, 2006;Bouzgarrou & Navatte, 2013;Craninckx & Huyghebaert, 2015;DeCesari et al., 2016). ...
... Firms with high family ownership show significant abnormal returns according to several studies. Significant positive returns to shareholders are found when families acquire other companies (André et al., 2014;Bouzgarrou & Navatte, 2013;Caprio et al., 2011;Craninckx & Huyghebaert, 2015). However, Basu et al. (2009) and Bauguess and Stegemoller (2008) found significant negative returns to shareholder wealth. ...
... Finally, the findings indicate that agency problems between the minority and majority shareholders in acquisitions are lessened. This finding is consistent with that of previous studies (see for example André et al., 2014;Ben-Amar & André, 2006;Bougarrou & Navatte, 2013;Caprio et al., 2011;Craninckx & Huyghebaert, 2015;DeCesari et al., 2016;Defrancq et al., 2016;Ruiz & Requejo, 2010). ...
... There were no previous studies that examined the moderating effect of corporate governance quality (both for firm-level and country-level) to the long-term performance after M&A. One related study is conducted by Craninckx and Huyghebaert (2015) that examined the moderating effect of the larger shareholders as corporate governance proxy to the negative impact of agency attitudes and management overconfidence in making M&A decisions on owner welfare (stock returns). The results proved that large institutional shareholders effectively limit the adverse effects of management's overconfidence when conducting M&A on returns obtained by owners. ...
... To be considered, the significant result of the MOTIVExCGFIRM interaction variable is not proven in Model 4 when the accounting variables were included in the analysis and only used 87 samples of M&A. Although there was no similarities with the previous studies, the finding related to moderating effect of firm-level governance in this study supports the results of Craninckx and Huyghebaert (2015) that proved the ability of large shareholders (as corporate governance proxy) to mitigate the negative effect of management's overconfidence in M&A decision on shareholder welfare. Both Craninckx and Huyghebaert (2015) and this study proved that firm-level governance mechanisms effective in maximizing the performance of M&A through better monitoring and controlling of management activities so it can reduce the opportunistic action of management. ...
... Although there was no similarities with the previous studies, the finding related to moderating effect of firm-level governance in this study supports the results of Craninckx and Huyghebaert (2015) that proved the ability of large shareholders (as corporate governance proxy) to mitigate the negative effect of management's overconfidence in M&A decision on shareholder welfare. Both Craninckx and Huyghebaert (2015) and this study proved that firm-level governance mechanisms effective in maximizing the performance of M&A through better monitoring and controlling of management activities so it can reduce the opportunistic action of management. Table 11 shows that the coefficients of MOTIVExCGCOUNTRY both in Models 3 and 6 are negative and insignificant value. ...
This study aims to examine the long-term performance of post-Mergers and Acquisitions (M&A) based on the motive’s category. This study also examines whether the governance at firm-level and country-level affects the relationship between motives and long-term performance of M&A. This study uses a sample of 301 completed M&A transactions of Asian companies in 11 countries from 2002 to 2012 and analyses the data using the cross-sectional moderated regression method. This study measures and categorizes M&A motives into synergy and agency categories using two alternate ways, which first using the stock market reaction data of acquirer and target at the M&A announcement period estimated by applying an event study methodology, and the second using the combination of the stock market reaction data and some accounting variables through logistic regression analysis. This study finds that synergy-motivated M&A results in significantly higher long-term performance post-M&A than agency-motivated M&A. It also proves that the positive effect of M&A motives on the long-term performance post-M&A is significantly higher when companies have better firm-level governance quality, but a similar result cannot be proved for country-level governance. This study provides a cross-country M&A study in the Asian region that has an essential role in global M&A activity in recent years. Considering the possibility of changes in company structure and environment post-M&A, this study contributes to provides an insight related to the role of the governance quality post-M&A as a monitoring tool in the realization of M&A predicted gain that can improve M&A performance.
... To examine whether a bidder's controlling shareholder extracts private benefits from M&A transactions, many previous studies have focused on the negative impact of ultimate shareholder ownership on bidder performance around the merger announcement date (Bae, Kang, & Kim, 2002;Craninckx & Huyghebaert, 2014;Faccio & Stolin, 2006;Holmen & Knopf, 2004). This paper attempts to better understand the overpayment behavior of the bidder's controlling shareholding. ...
... This self-serving behavior occurs more in countries with weak investor protections and less-developed capital markets (La Porta et al., 1999). Other studies find contrasting results, suggesting that concentrated ownership structures can have positive effects on both firm performance and M&A value creation (Boubakri, Cosset, & Guedhami, 2005;Craninckx & Huyghebaert, 2014;Kaplan & Minton, 1994;Shleifer & Vishny, 1986). Shleifer and Vishny (1986) were among the first to discuss the role of large shareholders as monitors, which creates benefits for all equity holders. ...
... Additionally, family firms adopt more conservative investment strategies. Few studies have examined the impact of family ownership on the value creation from acquisitions (André, Ben-Amar, and Saadi, 2014;Craninckx and Huyghebaert, 2014;Feito-Ruiz & Menedez-Requejo, 2010). Craninckx and Huyghebaert (2014) emphasize that family firms may only complete M&A for which expected synergies are sizeable and of limited risk. ...
This article investigates the effect of acquirers’ excess control rights on the acquisition premium in a context of control contestability. Using a sample of 169 transactions initiated by French listed firms over the period of 2000–2015, our findings provide evidence of i) a positive relationship between the control-ownership wedge of the ultimate controlling shareholder and target overpayment for non-family bidder firms, and ii) a negative impact of the presence of multiple large shareholders (MLS) on target overpayment. The bidding behavior is less pronounced in family-controlled firms. We show that the ultimate shareholders with excess control overpay for public targets when they hold more than 20% of the voting rights. The presence of MLS plays a crucial monitoring governance role by discouraging the ultimate owner from overpaying for targets. Overall, our findings contribute to the literature by examining the effect of controlling shareholder entrenchment on the acquisition premium in the presence of MLS. These findings are robust to a number of checks and have several policy implications.
JEL classification
G32G34
... Distinguishing among the sample countries is important in M&A research, because the legal environments and corporate governance vary greatly from area to area. It is rather surprising that only nine studies (Achleitner et al., 2010;André et al., 2014;Bae et al., 2002;Ben-Amar and André, 2006;Craninckx and Huyghebaert, 2015;Feito-Ruiz and Menéndez-Requejo, 2010;Franks et al., 2012;Huang et al., 2014;Song and Rath, 2010) consider the influence of the legal environment and the national corporate governance system, despite it having an influence on performance. The characterization of weaker and stronger shareholder protection systems is traditionally based on the divergence between common law and civil law systems. ...
... However, Song and Rath (2010) find that the expropriation effect is not as strong in Malaysian family businesses as in other East Asian economies, such as in Korea (Bae et al., 2002). In this vein, Craninckx and Huyghebaert (2015) argue that the external corporate governance regime does not succeed in protecting investors, as is assumed in the literature. They find that large family-controlled acquirers engage in valuecreating acquisitions in non-diversifying deals, but only in Continental Europe. ...
... A few studies suggest better abnormal returns for family firms, as well as better shareholder value creation after an M&A deal (e.g. André et al., 2014;Ben-Amar and André, 2006;Basu et al., 2009;Feito-Ruiz and Menéndez-Requejo, 2010;Bouzgarrou and Navatte, 2013), except when they engage in diversifying acquisitions (Craninckx and Huyghebaert, 2015). In contrast, others find that family businesses destroy value when acquiring another firm (Bauguess and Stegemoller, 2008;Gleason et al., 2014;Leepsa and Mishra, 2013), benefit less from acquisitions (Shim and Okamuro, 2011), and that family control has a negative effect on the market value, in comparison with the case of non-family firms (Wong et al., 2010). ...
Purpose
The purpose of this paper is to examine the current state of literature concerning mergers and acquisitions (M&A) in family businesses and to highlight areas for future research.
Design/methodology/approach
This literature review systematically analyses the findings of 41 journal articles on M&A in family businesses, identifying key thematic categories according to the main topics of the studies.
Findings
This study finds that it is important to distinguish and examine the type of governance, such as family and non-family, when studying M&A issues, because their distinctive features influence their strategic choices, business goals, and, thus, M&A behavior. Three topic areas are identified in existing research: M&A propensity, process, and performance. Furthermore, methodological and definitional issues regarding the findings are discussed.
Research limitations/implications
The findings imply that owing to their idiosyncratic nature, the use of alternative theoretical frameworks in addition to agency theory is encouraged in future studies in order to better capture the nature of family businesses. In general, further research on M&A issues in family business settings is needed, especially in the pre-merger phase, which is crucial to M&A performance.
Social implications
Overlooking particular issues that may arise in the context of transactions involving family businesses may lead to problems in M&A processes. Recognizing the importance of these issues in such transactions has important value for practitioners supporting family businesses in M&A processes.
Originality/value
This study takes the first step in analyzing the literature on M&A in family businesses, establishing linkages between family business, corporate governance, and financial management literature, and structuring the existing research to highlight opportunities with relevance for both theory and practice.
... With regard to M&A, an entrepreneurial activity associated with growth strategies (Dredge, 2019;Shim & Okamuro, 2011;Worek, 2017), some authors have measured firm performance using shareholders' value creation after the deal, comparing family and non-family businesses. A few studies find evidence that family firms' market value increases after an M&A deal compared with non-family firms (André, Ben-Amar, & Saadi, 2014;Andres, 2008;Basu, Dimitrova, & Paeglis, 2009;Ben-Amar & André, 2006;Bouzgarrou & Navatte, 2013;Feito-Ruiz & Menéndez-Requejo, 2010;Villalonga & Amit, 2006), except when family firms participate in diversifying acquisitions (Craninckx & Huyghebaert, 2015). This positive effect of family ownership on market value is supported by the fact that families invest part of their private wealth in the firm for its continuity and transfer of wealth, non-economic or economic to next generations (Miller & Le Breton-Miller, 2006). ...
... At higher ERT levels, family businesses have lower performance due to two reasons. First, Craninckx and Huyghebaert (2015) found that family firms' ERT activities, particularly in diversified acquisitions, negatively affect their performance. Second, the family firm may lack off resources necessary to manage the investment activities (Gomez-Mejía et al., 2010;Sirmon & Hitt, 2003) and negatively affect performance, as well. ...
In this study we reconcile the contradictory evidence found in the risk taking-performance relationship. We study the distinction between risk taking orientation and entrepreneurial risk taking and their effects on performance and find a non-linear, U-shaped relationship when it comes to risk taking orientation. Even though we did not find evidence that pursuing risky activities has an inverted u-shaped form, our results confirm that pursuing risky activities in family firms has similar effects than in non-family firms. We also study the role of context on family business risk attitudes and actions, and performance and find moderating effects at the industry, market and country levels on the risk taking orientation-performance relationship and partially, on the entrepreneurial risk taking-performance relationship.
... Block holders are a group of investors who normally have a sizable investment at stake in the focal firm. With this stake, block holders have greater incentive and more power to monitor management than small, dispersed owners, and thus block holders can alleviate agency conflicts between shareholders and management (Becker, Cronqvist, & Fahlenbrach, 2011;Craninckx & Huyghebaert, 2015;Goranova, Priem, Ndofor, & Trahms, 2017). In particular, the presence of a large shareholder promotes a focus on firm value maximization (Craninckx & Huyghebaert, 2015), encourages the restructure of informed trading into a positive attribute (Dai, Dharwadkar, Shi, & Zhang, 2017;Kedia, Rajgopal, & Zhou, 2017;Zhang, Piesse, & Filatotchev, 2012), reduces excessive corporate cash holdings (Becker et al., 2011), and constrains managerial private benefits, such as excessive top executive compensation (Cheng, Lin, Lu, & Wei, 2017;Yafeh & Yosha, 2003). ...
... With this stake, block holders have greater incentive and more power to monitor management than small, dispersed owners, and thus block holders can alleviate agency conflicts between shareholders and management (Becker, Cronqvist, & Fahlenbrach, 2011;Craninckx & Huyghebaert, 2015;Goranova, Priem, Ndofor, & Trahms, 2017). In particular, the presence of a large shareholder promotes a focus on firm value maximization (Craninckx & Huyghebaert, 2015), encourages the restructure of informed trading into a positive attribute (Dai, Dharwadkar, Shi, & Zhang, 2017;Kedia, Rajgopal, & Zhou, 2017;Zhang, Piesse, & Filatotchev, 2012), reduces excessive corporate cash holdings (Becker et al., 2011), and constrains managerial private benefits, such as excessive top executive compensation (Cheng, Lin, Lu, & Wei, 2017;Yafeh & Yosha, 2003). Therefore, a reduction in agency costs will enhance outsiders' confidence in the focal firm, which will then increase outsiders' willingness to provide resources to the focal firm. ...
Firms adopting deviant strategies are generally subject to impaired legitimacy and heightened risk. Based on the legitimacy literature, we hypothesize that strategically deviant firms are motivated to engage in corporate social responsibility activities as protection from a potential legitimacy loss. Using a sample of Chinese-listed firms during the 2003–2011 period, we find that firms with deviant strategies are more likely to engage in charitable donations. In addition, the positive effect of strategic deviance on donations is alleviated when firms communicate effectively with financial analysts, and when block holders largely own these firms.
... Recent research underlines that not only the ownership concentration but also the identity of concentrated ownership plays an important role in explaining the success of acquisitions ( Craninckx and Huyghebaert, 2015 ). The more actively a block owner is engaged in monitoring the management board of an acquired company, the more beneficial the role of the block owner appears ( Mietzner and Schweizer, 2014 ). ...
... Relevant block purchases with German targets were identified using the SDC/Thomson One Banker Deal database. To allow for comparability with the results of Craninckx and Huyghebaert (2015) , we choose the same sample period from 1997 to 2014. Following Choi (1991) , we define outside minority blocks as investors who own more than 5% but less than 50% of the target's firm voting stocks after the purchase. ...
We examine stock price reactions to minority block purchases in German target companies. Our results document that the formation of new outside blocks leads to significant value creation for target shareholders, the size of the effect depending on the identity of the block acquirer. As blocks by strategic investors or activist sponsors entail significantly higher returns compared to pure financial block acquirers this result can be ascribed to a differentiated support of the monitoring hypothesis of agency theory. We also find a negative relation between target firms’ growth before the acquisition and the value generation by new block owners.
... Triggered by the rise of research on managerial cognition (Sarkar, Osiyevskyy, & Clegg, 2018;Stubbart, 1989;Wilms, Winnen, & Lanwehr, 2019), a large number of scientific publications have provided ample empirical evidence that the emergence of hubrisa cognitive bias expressed through high levels of self-confidence, exaggerated pride, and overinflated positive self-evaluations (Judge, Piccolo, & Kosalka, 2009;Owen & Davidson, 2009;Petit & Bollaert, 2012) is by no means a rare phenomenon in leadership contexts. On the contrary, empirical examinations of executives' leadership performance by numerous case studies, such as the bankruptcy of Enron Corporation (Boje, Rosile, Durant, & Luhman, 2004), the astronomic financial losses of Vivendi Universal in 2001 (Petit & Bollaert, 2012), the failed merger of Volvo and Renault (Bruner, 1999), and various other companies (Craninckx & Huyghebaert, 2015;Mueller & Yurtoglu, 2007;Seth, Song, & Richardson Pettit, 2002), as well as the disastrous opening of Heathrow's Terminal 5 (Brady & Davies, 2010), indicate that the power inherent in leadership positions triggers the emergence of hubris (Hayward, 2007;Judge et al., 2009;Owen, 2006). The leadership behaviors of affected executives are found to deviate from normative standards (Fox & Groesser, 2016;Hiller & Hambrick, 2005;McManus, 2016), which is mainly attributed to a grandiose sense of themselves that hubristic leaders possess (Hayward & Hambrick, 1997;Judge et al., 2009;Petit & Bollaert, 2012). ...
A growing body of literature reveals that the emergence of hubris is by no means a rare phenomenon in leadership contexts. Despite having been repeatedly proven that hubris has both beneficial and detrimental manifestations in leadership behaviors, its positioning as a harmful cognitive bias continues to echo across disciplines. To unify the fragmented hubris tradition, this paper synthesizes existing literature and identifies three perspectives on hubristic leadership: an innovation perspective, an internal coordination and commercialization perspective, and a risk management perspective. The aggregation of these perspectives into a unifying theoretical framework indicates that the type of leadership behavior together with the predictability of its outcomes account for the ambivalent manifestations of hubris across leadership behaviors. Future research opportunities are discussed on this basis.
... Research has shown that the identity of the owner in control matters in many issues relating to the firm, including firm performance (Chen, Firth and Xu, 2009;Isakov and Weisskopf, 2014) and value creation through M&A (Craninckx and Huyghebaert, 2015). Different types of owners have different objectives and motivations as to how they want to exercise their control rights over the firms they invest in. ...
Concentrated ownership implies greater alignment between ownership and control, mitigating the agency problem. However it may also engender governance challenges such as funds appropriation through related party transactions and the oppression of minority shareholders, especially in the context of weak legal systems. We draw from legal theory (the tradeoff controlling shareholder model and private benefits of control) and from organization theory (socioemotional wealth), to suggest that concentrated ownership can be beneficial in both robust and weak legal systems for different reasons. We advance theory on the effects of controlling shareholders and suggest that the longer-term outlook associated with engaged concentrated ownership can aid the shift of the corporation towards Berle and Means’ (1932: 355) “third possibility” of corporations serving the interests of not just the stockholders or management but also of society.
... The impact may also interact with whether an acquisition leads to increased diversification. While less likely to diversify, family firms making diversifying acquisitions tend to perform better (Defrancq et al., 2016) or similar to acquisitions by non-family firms (Craninckx and Huyghebaert, 2015). Overall, research findings suggest that socioemotional and financial motives are not necessarily incompatible (Martin and Gomez-Mejia, 2016) and taking into account competing goals may reconcile conflicting research findings. ...
Although business restructuring occurs frequently and it is important for the prosperity of family firms across generations, research on family firms has largely evolved separately from research on business restructuring. This is a missed opportunity, since the two domains are complementary, and understanding the context, process, content, and outcome dimensions is relevant to both research streams. We address this by examining the intersection between research on business restructuring and family firms to improve our knowledge of each area and inform future research. To achieve this goal, we review and organize research across different dimensions to create an integrative framework. Building on current research, we focus on 88 studies at the intersection of family firm and business restructuring research to develop a model that identifies research needs and suggests directions for future research.
... Prior strategy literature on institutional ownership explores its impact on various aspects of strategic decision-making such as corporate R&D (Graves, 1988), FDI location choice (Lien & Filatotchev, 2015), internationalisation (Chen, Hsu, et al., 2014), and higher risk entry modes such as CBA (Craninckx & Huyghebaert, 2015;Gaspar, Massa, & Matos, 2005;Rhoades & Rechner, 2001). Apart from the strategic choices, institutional ownership also has impacts on firms' operating performance (Alfaraih, Alanezi, & Almujamed, 2012;Cornett, Marcus, Saunders, & Tehranian, 2007;Han & Suk, 1998) as well as merger & acquisition performance (Bi & Wang, 2015;Zhou & Lan, 2018). ...
Cross border acquisition (CBA), entailing a high level of risk, requires considerable experiential knowledge that EMNEs lack. There is a gap in the knowledge around how EMNEs compensate for their lack of experiential knowledge and how this experiential knowledge influences EMNEs’ adoption of CBA. Drawing from organisational learning theory and agency theory, this study posits that experiential knowledge acquired from inward internationalisation positively influences EMNEs’ CBA decisions and the effect can be modified by the varying strategic motives that dominant owners want to pursue in the organisation. The study examined a sample of 369 CBAs conducted by 205 Indian public listed companies from 2009 to 2017 to test the hypotheses in an Indian context.
... The empirical evidence on the financial performance outcomes of product diversification is mixed. While some authors suggest that product diversification offers unique financial benefits to family firms (Lee et al. 2012;Stadler et al. 2018;Tsai et al. 2009), others contest this finding by providing evidence of negative financial outcomes (Craninckx and Huyghebaert 2015;Muñoz-Bullón and Sánchez-Bueno 2012;van Essen et al. 2015). Lien and Li (2013) shed new light on these contrasting findings by discovering a curvilinear relationship between product diversification and firm performance. ...
Diversification represents an integral part of corporate strategy and is receiving increasing attention in the context of family firms. While family firms’ unique preferences in diversification decisions is the subject of a substantial amount of research, the commonalities and differences between the two dominant types of diversification, namely, product and international diversification, have only been explored cursorily. In fact, family business scholars treated product and international diversification as largely distinct phenomena. This paper seeks to close this research gap by taking stock of the extant literature and providing the first systematic review of both the product and international diversification research on family firms. The review analyzes 136 peer-reviewed scholarly articles published between 1991 and February 2018, provides a critical assessment of these research efforts, and proposes a family firm diversification research framework that can serve as a common foundation to guide future research. The article concludes by outlining five key recommendations for future research.
... Due to these differences, current acquisition theories cannot be unconditionally applied to family firms. The limited research in this area shows some differences between family and nonfamily firms in several areas, including lower acquisition propensity (Bauguess & Stegemoller, 2008;Miller et al., 2010), and contradictory evidence of both higher (André, Ben-Amar, & Saadi, 2014;Craninckx & Huyghebaert, 2015;Feito-Ruiz & Menéndez-Requejo, 2010) and lower performance (Basu et al., 2009;Bauguess & Stegemoller, 2008;Shim & Okamuro, 2011) compared to nonfamily firms. Beyond propensity and performance, other studies examine the acquisition process (Bjursell, 2011;Mickelson & Worley, 2003;Steen & Welch, 2006), but not the acquisition goals, despite that family firms are acknowledged as having other preferences when engaging in acquisitions (Angwin, 2007;Feito-Ruiz & Menéndez-Requejo, 2010). ...
Despite the considerable body of research on acquisitions and their goals, we lack insights on how family firms differ from nonfamily firms in their acquisition goals, particularly in view of the characteristics that distinguish family businesses. Thus, to enhance current understanding, we examine firms’ disclosed goals in their deal announcements and find that firm ownership type is an important determinant of acquisition goals. Drawing on the content analysis of 558 deals from 393 firms, we identify seven goal categories. Our findings contextualize several differences in the goals of family and nonfamily firms, contributing to the family firm and acquisition literatures, offering implications for practice and potential avenues for future research.
... Beside industry and business motivations, the institutional context is also deemed one of the main determinants of disproportional ownership devices. In particular, according to the law and finance approach, regulation framework and degree of investor protection matter for these tools (Craninckx & Huyghebaert, 2015;Venezze, 2014). Stemming from this view, La 1999) observe that weak shareholder protection is related to high ownership concentration and presence of disproportional ownership devices. ...
The paper aims to systematize the literature on disproportional ownership devices by reviewing and classifying 148 articles published in international academic journals over the last 25 years. The findings show that the scholarly attention on disproportional ownership devices has grown over time. Most papers adopt the agency framework and examine the mechanisms for leveraging voting power and to lock-in control, especially in civil law countries. Corporate governance journals prevail as leading outlets, despite the lack of publications specialized on the topic. Finally, the literature systematization highlights a research taxonomy based on outcomes and drivers of disproportional ownership devices. The article has both theoretical and practical implications. First, it develops a literature framework that systematically outlines the main research streams on the topic and identifies under-explored issues so as to guide future scholarly efforts. Second, it highlights the implications of disproportional ownership devices for company outcomes and reporting. Thereby, on the one hand, it supports managers in selecting the appropriate combination of these mechanisms so as to attract and retain investors. On the other hand, it emphasizes the importance of proper policy making interventions to improve transparency, openness and competitiveness of financial markets.
The study investigates the effect of corporate governance characteristics on the financial performance of 124 Indian-listed companies that have undergone mergers and acquisitions during 2014–2020. It employs several performance measures, such as short-term capital market performance, long-term capital market performance, accounting-based and market-based measures, and firm-level control factors. The study found board size to be a positive and significant factor affecting short-term market performance. Further, it also documents weak linkages with other corporate governance variables like board independence, CEO duality, etc. Regarding control variables, leverage, the company's age, price-to-book ratio, and research and development expenses significantly impact the acquiring companies' financial returns. The study's findings add to our understanding of corporate governance's impact on performance in cases such as mergers and acquisitions.
Despite the high activity on the market for corporate control, more than 60% of M&As are unsuccessful and contribute to damage to the value of the acquiring company. We still have little evidence on the impact of M&A deals in different countries and industries on shareholer value, as well as the factors that influence this impact. Academic researchers and practitioners continue to seek out the factors that influence M&A performance, but results are still inconclusive, indicating the need for further research into acquisition performance and factors that influence the overall success of M&A deals. This paper examines the impact of CEO overconfidence on the performance of M&A deals in the United States. In contrast to previous studies, we, first of all, use earnings call transcripts in content analysis as the base to measure CEO overconfi-dence; secondly, we apply cluster analysis to identify the factors that force CEOs to structure their speech during earnings calls in a similar manner; and, thirdly, we assess the impact of CEO overconfidence on the performance of high-tech deals. The study is based on a sample of 492 M&A transactions implemented during the post-crisis period, 2009–2019. Using the event study method to assess the performance of M&A deals and regression analysis, we prove that CEO overconfidence has a negative impact on the success of M&As. However, when considering a subsample of deals in which the target com-pany operates in a high-tech industry, we failed to identify a significant impact of overconfidence on M&A performance. As a result of cluster analysis, we identified a cluster of 165 companies with a common structure and similarity of CEO speeches, which are not explained by the companies’ affiliation with similar industries. This suggests that overconfident CEOs tend to use and structure their speeches similarly.
Concentrated ownership implies greater alignment between ownership and control, mitigating the agency problem. However, it may also engender governance challenges such as funds appropriation through related party transactions and the oppression of minority shareholders, especially in the context of weak legal systems. We draw from legal theory (the tradeoff controlling shareholder model and private benefits of control) and from organization theory (socioemotional wealth), to suggest that concentrated ownership can be beneficial in both robust and weak legal systems for different reasons. We advance theory on the effects of controlling shareholders and suggest that the longer-term outlook associated with engaged concentrated ownership can aid the shift of the corporation toward Berle and Means' (1932, p. 355) “third possibility” of corporations serving the interests of not just the stockholders or management but also of society. © 2022 by Emerald Publishing Limited All rights of reproduction in any form reserved.
Os estudos sobre remuneração corporativa despertaram o interesse da academia e do meio empresarial nos últimos anos, principalmente após os órgãos normatizadores e reguladores terem estabelecidos regras mais rígidas de transparência das formas de remuneração de executivos. Nesse sentido, este estudo objetiva analisar se existe diferença na remuneração total de executivos entre empresas familiares e não familiares que efetuaram aquisições corporativas no período 2009-2016. Os dados de remuneração de executivos foram coletados no site da B3. Já a identificação das aquisições corporativas e a obtenção das demais informações ocorreram por meio da base de dados da Thomson Reuters Eikon. As empresas foram classificadas como familiares ou não familiares a partir da abordagem de componente de envolvimento da família no controle, na propriedade e na gestão da empresa e da abordagem de identidade organizacional, autodeclarada no histórico da empresa. No total, 96 empresas, 39 familiares e 57 não familiares, participaram de 281 aquisições como adquirentes, as quais foram analisadas mediante regressão múltipla com dados em painel não balanceado. Os resultados apontaram que o aumento na remuneração total de executivos das empresas não familiares é superior em relação as empresas familiares no período pós-aquisição. Assim, como contribuição prática, os achados podem levar os acionistas das empresas a refletirem sobre o uso da estratégia de aquisições corporativas, uma vez que os executivos das empresas adquirentes não familiares recebem, em média, maiores remunerações. A contribuição teórica está na análise segregada das empresas, se familiar ou não familiar, que permite uma visão diferente dos resultados e peculiar da Teoria da Agência.
Objetivo: Este estudo objetiva verificar se as aquisições realizadas por empresas familiares geram melhor desempenho do que aquelas realizadas por empresas não familiares listadas na B3 no período entre 2009 e 2016.Método: As informações necessárias foram coletadas na base de dados da Thomson Reuters Eikon e no site da B³, e a classificação das empresas em familiares ou não familiares foi feita por meio da abordagem de componente de envolvimento da família no controle, na propriedade e na gestão da empresa e da abordagem de identidade organizacional. Regressões múltiplas com dados empilhados foram estimadas para a amostra de 244 aquisições (86 empresas).Resultados: Os resultados indicaram que as empresas brasileiras familiares apresentam, em média, desempenho superior dos eventos de aquisições corporativas em relação às empresas brasileiras não familiares. Os achados são consistentes com a Teoria da Agência, que diz que o distanciamento entre a propriedade e o controle resulta em conflitos de agência e assimetria informacional, problemas que oferecem maiores oportunidades de expropriação dos acionistas por parte dos gestores. Assim, visto que nas empresas familiares esse distanciamento é menor, pois a propriedade e a gestão tendem a coincidir, os conflitos de agência e a assimetria informacional entre principal-agente ocorrem com menor intensidade nas empresas familiares em comparação às empresas não familiares.Contribuições: As evidências empíricas permitem reflexões, tanto aos acionistas quanto aos executivos, sobre o uso da estratégia de aquisição corporativa, além de instigar novos mecanismos de controle e monitoramento por parte dos acionistas sobre a tomada de decisão dos gestores.
Entrenchment Effect Role of Ownership Concentration for Increasing Earnings Quality. The research objective was to examine the moderating role of ownership concentration in the effect of disclosure of sustainability report information on earnings quality. The research method used is moderating regression analysis with a sample of 447 reports for the 2010-2018 period. This study found the role of the entrenchment effect of ownership concentration to moderate the disclosure of sustainability information on earnings quality. Concentrated companies can make disclosure of sustainability information to act opportunistically. In addition, these findings also indicate that companies need to consider many aspects related to developing earnings quality.
This chapter surveys the recent trends in the literature on the performance of M&A deals in developed and emerging capital markets. This literature is voluminous, diverse and challenging. We focus on the transactions within one country—domestic M&As—in particular focusing on the methods that the researchers use to estimate whether M&A deals promote efficiency gains or not. We discuss the research instruments which allow an assessment of the effects of M&As on firm operating performance and on firm value. Analysing the results of latest empirical studies, we reveal that target shareholders gain significantly in M&A deals. The evidence suggests that in most cases, acquiring shareholders receive negative or insignificant returns in the short run in developed capital markets, while in emerging economies, acquiring shareholders mostly gain in M&A deals. Operating performance analysis reveals mixed results in developed and emerging capital markets, while the analysis of papers which use value performance indicators shows the destruction of company value due to M&As in developed and emerging capital markets. The review also analyses studies that examine the relationship between different methods.
To explore the trends in buying and selling the firms in emerging markets, this chapter introduces the key features in the strategic deals in the largest markets within BRIC group. The upward and downward trends in purchasing corporate control that constitute the waves in the M&As activities in these countries are shown. The authors underline the role of government regulations and enhancement of competition in these countries in structuring the M&As waves. The changes in the industrial profiles, as well as the dollar volume and the quantity of deals in BRIC are presented. Both domestic and cross-border deals made by Chinese, Indian, Brazilian, and Russian firms are summarized.
Diversification acquisitions can provide an effective way to reduce the risk of company’s operations. Family businesses present on the Warsaw Stock Exchange also make such acquisitions, as we show in the study presented in this article. However, achieving
a strong level of diversification in the case of public companies may be a difficult task, as such a development strategy may conflict with the interests of minority shareholders. For this reason, this article also considers possible development paths that can be used by families in asset management strategies.
This paper examines the impact of institutional ownership on merger and acquisition (M&A) performance of Chinese listed firms from 2006 to 2017. The results indicate that institutional ownership positively affects M&A performance, and so does institutional ownership concentration. Moreover, the results suggest that pressure-sensitive, large, and domestic institutional ownership have a greater positive effect on M&A performance than pressure-insensitive, small, and foreign institutional ownership.
The pharmaceutical market plays a crucial role in the global economy. The level of competitiveness among companies in this sector is very high. To retain their position or even speed up the
growth, market players continuously use takeovers as one of the major tools embedded in theirstrategies. Nevertheless, despite this fact, the concentration level on this market has stayed relatively stable for the last two decades. Furthermore, it is also confirmed in the literature that such transactions usually tend to deteriorate value for the buyers and their shareholders. Based on the sample of 127 deals taking place between 1998 and 2011, this study uses a quantitative analysis to evaluate the impact of takeovers on acquirers. It covers event and accounting studies. Depending on the time window used in this study, the results show either lack of statistically significant effect of acquisition on buyers or that such impact is negative. These conclusions are in line with the existing literature findings.
M&As provide unique opportunities for the acquirer to grow rapidly, to gain new capabilities which an organisation might otherwise find difficult to develop on its own, and to gain access to new markets (e.g. Haspeslagh and Jemison, 1991; Hitt et al., 2001). Recent trends indicate that cross-border mergers and acquisitions (M&As) keep increasing following the double-dip recession (World Investment Report, 2014). While M&As have become increasingly popular as a method of organisational growth and development, the acquisition success rate has remained mediocre at best. Accordingly, M&A success and value creation have been at the heart of M&A research and have been approached from various disciplines (cf. King et al., 2004; Cartwright and Schoenberg, 2006; Schoenberg, 2006; Degbey, 2015). A number of scholars have tried to explain cross-border M&A failure through external issues, such as national cultural differences, but the results have been inconclusive (cf. Teerikangas and Very, 2006; Stahl and Voigt, 2008), and it has been argued that the effect of culture on M&A performance is mediated by the post-acquisition integration strategy, the acquisition experience and integration capabilities of the acquirer, and the level of integration (e.g. Morosini and Singh, 1994; Slangen, 2006; Dikova and Sahib, 2013). However, a growing body of literature on post-acquisition integration has focused on internal issues, that is, the human side, and argues that M&A failure is largely down to socio-cultural challenges such as change resistance, acculturation stress and so forth (e.g. Buono and Bowditch, 1989; Datta, 1991; Cartwright and Cooper, 1993; Very et al., 1996; Birkinshaw et al., 2000; Stahl and Voigt, 2008).
We examine the mechanisms used to limit expropriation of firm wealth by large shareholders among S&P 500 firms with founding-family ownership. Consistent with agency theory, we find that the most valuable public firms are those in which independent directors balance family board representation. In contrast, in firms with continued founding-family ownership and relatively few independent directors, firm performance is significantly worse than in non-family firms. We also find that a moderate family board presence provides substantial benefits to the firm. Additional tests suggest that families often seek to minimize the presence of independent directors, while outside shareholders seek independent director representation. These findings highlight the importance of independent directors in mitigating conflicts between shareholder groups and imply that the interests of minority investors are best protected when, through independent directors, they have power relative to family shareholders. We argue that expanding the discussion beyond manager-shareholder conflicts to include conflicts between shareholder groups provides a richer setting in which to explore corporate governance and the balance of power in U.S. firms.
In large U.S. corporations, founding families are the only blockholders whose control rights
on average exceed their cash-flow rights. We analyze how they achieve this wedge, and at
what cost. Indirect ownership through trusts, foundations, limited partnerships, and other
corporations is prevalent but rarely creates a wedge (a pyramid). The primary sources of the
wedge are dual-class stock, disproportionate board representation, and voting agreements.
Each control-enhancing mechanism has a different impact on value. Our findings suggest
that the potential agency conflict between large shareholders and public shareholders in the
United States is as relevant as elsewhere in the world.
Recent research indicates that founding families have substantial stakes in roughly one-third of the largest U.S. companies and, in these firms, control nearly twenty percent of all board seats. Burkart, Panunzi, and Shleifer (2003) suggest that a key element in the desirability of family ownership is the ability to limit the family's expropriation of minority shareholders. Consistent with this notion, we find that the most valuable public firms are those in which independent directors balance family board representation. In contrast, in firms with continued founding family ownership and relatively few independent directors, firm performance is significantly worse than in non-family firms. We also document that moderate family board presence provides substantial benefits to the firm. Additional tests suggest that families often seek to minimize the presence of independent directors, while outside shareholders seek independent director representation. These findings highlight the importance of independent directors in mitigating shareholder-shareholder conflicts and suggest that considering shareholder-shareholder conflicts provides a richer setting in which to explore corporate governance. Note: A list of the firms classified as family and non-family firms is available from the authors.
Anecdotal accounts imply that founding families routinely engage in opportunistic activities that exploit minority shareholders. We gauge the severity of these moral hazard conflicts by examining whether founding families--as large, undiversified blockholders--seek to reduce firm-specific risk by influencing the firm's diversification and capital structure decisions. Surprisingly, we find that family firms actually experience less diversification than, and use similar levels of debt as, nonfamily firms. Consistent with these findings, we also find that direct measures of equity risk are not related to founding-family ownership, which suggests that family holdings are not limited to low-risk businesses or industries. Although founding-family ownership and influence are prevalent and significant in U.S. industrial firms, the results do not support the hypothesis that continued founding-family ownership in public firms leads to minority-shareholder wealth expropriation. Instead, our results show that minority shareholders in large U.S. firms benefit from the presence of founding families.
This collection is the first comprehensive selection of readings focusing on corporate bankruptcy. Its main purpose is to explore the nature and efficiency of corporate reorganisation using interdisciplinary approaches drawn from law, economics, business, and finance. Substantive areas covered include the role of credit, creditors' implicit bargains, non-bargaining features of bankruptcy, workouts of agreements, alternatives to bankruptcy, and proceedings in countries other than the United States, including the United Kingdom, Europe, and Japan.
The paper examines the impact of ownership structure on company economic performance in 435 of the largest European companies. Controlling for industry, capital structure and nation effects we find a positive effect of ownership concentration on shareholder value (market‐to‐book value of equity) and profitability (asset returns), but the effect levels off for high ownership shares. Furthermore we propose and support the hypothesis that the identity of large owners—family, bank, institutional investor, government, and other companies—has important implications for corporate strategy and performance. For example, compared to other owner identities, financial investor ownership is found to be associated with higher shareholder value and profitability, but lower sales growth. The effect of ownership concentration is also found to depend on owner identity. Copyright © 2000 John Wiley & Sons, Ltd.
This Paper studies the determinants of mergers and acquisitions around the world during the 1990s by focusing on differences in laws and regulation across countries. We find that the volume of M&A activity and the premium paid are significantly larger in countries with better investor protection. This result indicates that an active market for mergers and acquisitions is a more important component of the corporate governance regime of countries with better investor protection. We also show that in cross-border deals, the targets are typically from countries with poorer investor protection than the acquirers. Hence, cross-border transactions play a governance role by improving the degree of investor protection within target firms. This finding suggests that an increase in cross-border transactions may generate a worldwide convergence of corporate governance systems.
We show that institutional shareholders of acquiring companies on average do not lose money around public merger announcements, because they hold substantial stakes in the targets and make up for the losses from the acquirers with the gains from the targets. Depending on their holdings in the target, acquirer shareholders generally realize different returns from the same merger, some losing money and others gaining. This conflict of interest is reflected in the mutual fund voting behavior: In mergers with negative acquirer announcement returns, cross-owners are significantly more likely to vote for the merger.
In contrast to the widely held belief that targets capture the lion's share of merger gains, I show that the average dollar gains to targets are only modestly more than the dollar gains to acquirers. To help explain the variation in merger outcomes, I present empirical evidence in support of a new hypothesis that a target's relative scarcity (proxied by its market power) and product market dependence (proxied by customer-supplier relations) help to explain its share of the total merger gains. These results provide new evidence for an unexplored role of product markets on bargaining outcomes in mergers.
This paper examines a sample of firms experiencing proxy contests for seats on their board of directors. Dissident shareholders usually fail to obtain a majority of board seats. Nevertheless, they capture some seats, via mechanisms such as cumulative voting, in over half of the sample contests. Regardless of proxy contest outcome, positive and statistically significant share price performance is associated with the contest. That finding is predicted by the standard economic analysis of proxy contests, in which the challenges benefit shareholders by improving corporate performance. The finding runs counter to the claim of Berle (1962) that the economists' view of proxy contests is ‘a wholly imaginary picture’. A portion of the positive share price changes taking place in the early stages of some proxy contests is not permanent, however, and as suggested by Manne (1962) is at least partially attributable to temporary increases in the market value of the vote attached to corporate shares.
This paper examines properties of daily stock returns and how the particular characteristics of these data affect event study methodologies. Daily data generally present few difficulties for event studies. Standard procedures are typically well-specified even when special daily data characteristics are ignored. However, recognition of autocorrelation in daily excess returns and changes in their variance conditional on an event can sometimes be advantageous. In addition, tests ignoring cross-sectional dependence can be well-specified and have higher power than tests which account for potential dependence.
Using observations of 1,132 small- and medium-sized enterprises in eight European countries, a comparison is made of family and nonfamily businesses. The variables compared concern values and attitudes, objectives, and strategic behavior. The data reveal that family businesses are inwardly directed or closed family-related systems. Among their managers are fewer pioneers than “all-rounders” and organizers; as a consequence, their strategic behavior is rather conservative. Therefore, family businesses should be viewed as stable rather than progressive or dynamic factors of the economy.
Abstract This paper presents an in-depth analysis of the performance of large, medium-sized, and small corporate takeovers involving Continental European and UK firms during the fifth takeover wave. We find that takeovers are expected to create takeover synergies as their announcements trigger statistically significant abnormal returns of 9.13% for the target and of 0.53% for bidding firms. The characteristics of the target and bidding firms and of the bid itself are able to explain a significant part of these returns: (i) deal hostility increases the target's but decreases bidder's returns; (ii) the private status of the target is associated with higher bidder's returns; and (iii) an equity payment leads to a decrease in both bidder's and target's returns. The takeover wealth effect is however not limited to the bid announcement day but is also visible prior and subsequent to the bid. The analysis of pre-announcement returns reveals that hostile takeovers are largely anticipated and associated with a significant increase in the bidder's and target's share prices. Bidders that accumulate a toehold stake in the target experience higher post-announcement returns. A comparison of the UK and Continental European M&A markets reveals that: (i) the takeover returns of UK targets substantially exceed those of Continental European firms. (ii) The presence of a large shareholder in the bidding firm has a significantly positive effect on takeover returns in the UK and a negative one in Continental Europe. (iii) Weak investor protection and low disclosure in Continental Europe allow bidding firms to adopt takeover strategies enabling them to act opportunistically towards the target's incumbent shareholders.
This paper analyses the short‐term wealth effects of large intra‐European takeover bids. We find announcement effects of 9% for the target firms compared to a statistically significant announcement effect of only 0.7% for the bidders. The type of takeover bid has a large impact on the short‐term wealth effects with hostile takeovers triggering substantially larger price reactions than friendly operations. When a UK firm is involved, the abnormal returns are higher than those of bids involving both a Continental European target and bidder. There is strong evidence that the means of payment in an offer has an impact on the share price. A high market‐to‐book ratio of the target leads to a higher bid premium, but triggers a negative price reaction for the bidding firm. We also investigate whether the predominant reason for takeovers is synergies, agency problems or managerial hubris. Our results suggest that synergies are the prime motivation for bids and that targets and bidders share the wealth gains.
Much of the literature on corporate acquisitions has focused on managerial incentives for making acquisitions but has underemphasized the role played by the social context of major shareholders. This study of Fortune 1000 firms argues that the priorities and risk preferences of family owners can have important implications not only for the volume but also for the diversifying nature of their acquisitions. Agency and family business perspectives are used to derive expectations concerning the acquisitions behavior of family owners. Consistent with both perspectives, and owners' desire to reduce business risk, we find that family ownership is inversely related to the number and dollar volume of acquisitions. However, whereas agency theorists differ about how ownership concentration influences whether acquisitions are diversified, the family firm literature is more definitive. The latter suggests that given family owners' desire to retain control of their firms for offspring, their wealth must remain concentrated. Hence they can most easily reduce the risk of their wealth portfolio by diversifying the business—that is, through diversifying acquisitions. Consistent with this logic, we found the propensity to make diversifying acquisitions to increase with the level of family ownership. Copyright © 2009 John Wiley & Sons, Ltd.
We examine a sample of 12,023 acquisitions by public firms from 1980 to 2001. The equally weighted abnormal announcement return is 1.1%, but acquiring-firm shareholders lose $25.2 million on average upon announcement. This disparity suggests the existence of a size effect in acquisition announcement returns. The announcement return for acquiring-firm shareholders is roughly two percentage points higher for small acquirers irrespective of the form of financing and whether the acquired firm is public or private. The size effect is robust to firm and deal characteristics, and it is not reversed over time.
Based on 412 control transactions between 1990 and 2000 we construct a measure of the private benefits of control in 39 countries. We find that the value of control ranges between -4% and +65%, with an average of 14%. As predicted by theory, in countries where private benefits of control are larger capital markets are less developed, ownership is more concentrated, and privatizations are less likely to take place as public offerings. We also analyse what institutions are most important in curbing these private benefits. A high degree of statutory protection of minority shareholders and high degree of law enforcement are associated with lower levels of private benefits of control, but so are a high level of diffusion of the press, a high rate of tax compliance, and a high degree of product market competition. A crude R-squared test suggests that the 'non traditional' mechanisms have at least as much explanatory power as the legal ones commonly mentioned in the literature. In fact, in a multivariate analysis newspapers' circulation and tax compliance seem to be the dominating factors. We advance an explanation why this might be the case.
We examine how the market reacts to announcements of mergers and acquisitions (M&As) by well-performing acquirers and evaluate the results in light of three hypotheses: 1) managerial ability, 2) empire building, and 3) chief executive officer (CEO) overconfidence. Our results indicate that an empire-building motive drives the relationship between past superior operating performance and M&A announcements. Long-term operating performance drops significantly for acquiring firms with past superior operating performance. Our evidence also indicates that the presence of insider directors helps to alleviate the negative perception of acquisitions made by firms with better operating performance or empire-building CEOs.
We show that acquisitions initiated during periods of high merger activity (“merger waves”) are accompanied by poorer quality of analysts’ forecasts, greater uncertainty, and weaker CEO turnover-performance sensitivity. These conditions imply reduced monitoring and lower penalties for initiating inefficient mergers. Therefore, merger waves may foster agency-driven behavior, which, along with managerial herding, could lead to worse mergers. Consistent with this hypothesis, we find that the average long-term performance of acquisitions initiated during merger waves is significantly worse. We also find that corporate governance of in-wave acquirers is weaker, suggesting that agency problems may be present in merger wave acquisitions.
In contrast to the widely held belief that targets capture the lion’s share of merger gains, I document considerable variation in the division of dollar gains in mergers and find that the gains to targets are only modestly more than the gains to acquirers. I present empirical evidence in support of a new hypothesis that argues that a firm’s relative scarcity (proxied by its market power) and product market dependence (proxied by customer-supplier relations) help to explain the firm’s share of the total merger gains. These results provide some of the first large-scale evidence on bargaining outcomes in mergers.
In this paper we develop various measures of M&A failure for an intra-European sample during the fifth takeover wave: inferior long-term stock performance, inferior operating performance, and target divestment. After documenting the extent of M&A failure, we test the relation between short-term abnormal returns at deal announcement and M&A failure. We examine a sample where listed bidders acquire listed targets (267 deals) as well as privately-held targets (336 deals). Our results indicate M&A failure rates up to 50% in both samples. When acquirers and targets are listed, lower M&A announcement returns are consistently and significantly associated with higher M&A failure probabilities and long-term losses. In contrast, when targets are privately held, we find no evidence of such an association.
In large U.S. corporations, founding families are the only blockholders whose control rights on average exceed their cash-flow rights. We analyze how they achieve this wedge, and at what cost. Indirect ownership through trusts, foundations, limited partnerships, and other corporations is prevalent but rarely creates a wedge (a pyramid). The primary sources of the wedge are dual-class stock, disproportionate board representation, and voting agreements. Each control-enhancing mechanism has a different impact on value. Our findings suggest that the potential agency conflict between large shareholders and public shareholders in the United States is as relevant as elsewhere in the world. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.
Sweden has a high degree of separation of ownership from control through pyramids, dual-class shares, and cross-holdings. This increases the potential for private benefits of control. However, Sweden's extralegal institutions - tax compliance and newspaper circulation - are consistent with greater shareholder protection. Using data on Swedish mergers we find limited evidence of shareholder expropriation. Apparently, Sweden's extralegal institutions offset the drawback of weak corporate governance.
This paper investigates how the investment horizon of a firm's institutional shareholders impacts the market for corporate control. We find that target firms with short-term shareholders are more likely to receive an acquisition bid but get lower premiums. This effect is robust and economically significant: Targets whose shareholders hold their stocks for less four months, one standard deviation away from the average holding period of 15 months, exhibit a lower premium by 3%. In addition, we find that bidder firms with short-term shareholders experience significantly worse abnormal returns around the merger announcement, as well as higher long-run underperformance. These findings suggest that firms held by short-term investors have a weaker bargaining position in acquisitions. Weaker monitoring from short-term shareholders could allow managers to proceed with value-reducing acquisitions or to bargain for personal benefits (e.g., job security, empire building) at the expense of shareholder returns.
We demonstrate that the overall gains (the weighted average of gains to the bidder and target firms) from a recent sample of bank mergers are slightly positive, but statistically indistinguishable from zero. This lends support to recent studies which fail to find any significant cost savings resulting from bank mergers. We also demonstrate the characteristics of mergers that the market perceives as most valuable. These attributes include high prior levels of profitability for the bidder, considerable operations overlap between the target and the bidder, and a method of financing that reveals positive information about the bidder or the synergies likely to be created by the merger.
We provide empirical evidence on how cross-border acquisitions from the perspective of an US acquirer differ from domestic transactions based on stock and operating performance measures. For a sample of 4430 acquisitions between 1985 and 1995 and controlling for various factors we find that US firms who acquire cross-border targets relative to those that acquire domestic targets experience significantly lower announcement stock returns of approximately 1% and significantly lower changes in operating performance. Stock returns are negatively associated with an increase in both global and industrial diversification. Cross-border takeover activity has increased during the past decade and the observed difference in bidder gains is more pronounced for the latter half of the sample period. We find that bidder returns are positively related to takeover activity in the target country and to a legal system offering better shareholder rights. With the exception of the UK, the target country's degree of economic restrictiveness is negatively related to bidder returns.
We study industry-level patterns in takeover and restructuring activity during the 1982–1989 period. Across 51 industries, we find significant differences in both the rate and time-series clustering of these activities. The interindustry patterns in the rate of takeovers and restructurings are directly related to the economic shocks borne by the sample industries. These results support the argument that much of the takeover activity during the 1980s was driven by broad fundamental factors and have general implications for the stock price spillover effects of takeover announcements, corporate performance following takeovers, and the timing of takeover waves.
We employ corporate takeover decisions to investigate the impact of institutional ownership on corporate performance. The OLS regressions of bidder gains on institutional ownership indicate a positive relation between the two. However, we find institutional ownership to be significantly determined by firm size, insider ownership and the firm's presence in the S&P 500 index. Thus, when bidder gains are regressed on the predicted values of institutional ownership in two-stage regressions, the recursive estimates do not confirm the relationship shown by the OLS regressions. Furthermore, we do not find any evidence that active institutional investors (e.g., CalPERS) as a group enhance efficiency in the market for corporate control. These findings cast doubt on the superior selection/monitoring abilities of institutional investors.
Using proxy data on all Fortune-500 firms during 1994–2000, we find that family ownership creates value only when the founder serves as CEO of the family firm or as Chairman with a hired CEO. Dual share classes, pyramids, and voting agreements reduce the founder's premium. When descendants serve as CEOs, firm value is destroyed. Our findings suggest that the classic owner-manager conflict in nonfamily firms is more costly than the conflict between family and nonfamily shareholders in founder-CEO firms. However, the conflict between family and nonfamily shareholders in descendant-CEO firms is more costly than the owner-manager conflict in nonfamily firms.
Within a cost–benefit framework, we hypothesize that independent institutions with long-term investments will specialize in monitoring and influencing efforts rather than trading. Other institutions will not monitor. Using acquisition decisions to reveal monitoring, we show that only concentrated holdings by independent long-term institutions are related to post-merger performance. Further, the presence of these institutions makes withdrawal of bad bids more likely. These institutions make long-term portfolio adjustments rather than trading for short-term gain and only sell in advance of very bad outcomes. Examining total institutional holdings or even concentrated holdings by other types of institutions masks important variation in the subset of monitoring institutions.
We investigate the role of ownership structure and investor protection in postprivatization corporate governance. Using a sample of 209 privatized firms from 39 countries over the period 1980 to 2001, we find that the government relinquishes control over time to the benefit of local institutions, individuals, and foreign investors, and that private ownership tends to concentrate over time. Firm size, growth, and industry affiliation, privatization method, as well as the level of institutional development and investor protection, explain the cross-firm differences in ownership concentration. The positive effect of ownership concentration on firm performance matters more in countries with weak investor protection.
Does CEO overconfidence help to explain merger decisions? Overconfident CEOs over-estimate their ability to generate returns. As a result, they overpay for target companies and undertake value-destroying mergers. The effects are strongest if they have access to internal financing. We test these predictions using two proxies for overconfidence: CEOs’ personal over-investment in their company and their press portrayal. We find that the odds of making an acquisition are 65% higher if the CEO is classified as overconfident. The effect is largest if the merger is diversifying and does not require external financing. The market reaction at merger announcement (-90 basis points) is significantly more negative than for non-overconfident CEOs (-12 basis points). We consider alternative interpretations including inside information, signaling, and risk tolerance.
We study the determinants of mergers and acquisitions around the world by focusing on differences in laws and regulation across countries. We find that the volume of M&A activity is significantly larger in countries with better accounting standards and stronger shareholder protection. The probability of an all-cash bid decreases with the level of shareholder protection in the acquirer country. In cross-border deals, targets are typically from countries with poorer investor protection than their acquirers’ countries, suggesting that cross-border transactions play a governance role by improving the degree of investor protection within target firms.
Estimates of the cost of equity for industries are imprecise. Standard errors of more than 3.0% per year are typical for both the CAPM and the three-factor model of Fama and French (1993). These large standard errors are the result of(i) uncertainty about true factor risk premiums and (ii) imp ecise estimates of the loadings of industries on the risk factors. Estimates of the cost of equity for firms and projects are surely even less precise.
This paper examines properties of daily stock returns and how the particular characteristics of these data affect event study methodologies. Daily data generally present few difficulties for event studies. Standard procedures are typically well-specified even when special daily data characteristics are ignored. However, recognition of autocorrelation in daily excess returns and changes in their variance conditional on an event can sometimes be advantageous. In addition, tests ignoring cross-sectional dependence can be well-specified and have higher power than tests which account for potential dependence.
This paper empirically examines how family-controlled firms perform in relation to firms with nonfamily controlling shareholders in Western Europe. The sample consists of 1672 non-financial firms. Active family control is associated with higher profitability compared to nonfamily firms, whereas passive family control does not affect profitability. Active family control continues to outperform nonfamily control in terms of profitability in different legal regimes. Active and passive family control is associated with higher firm valuations, but the premium is mainly due to economies with high shareholder protection. The benefits from family control occur in nonmajority held firms. These results suggest that family control lowers the agency problem between owners and managers, but gives rise to conflicts between the family and minority shareholders when shareholder protection is low and control is high.
We show that institutional shareholders of acquiring companies on average do not lose money around public merger announcements, because they hold substantial stakes in the targets and make up for the losses from the acquirers with the gains from the targets. Depending on their holdings in the target, acquirer shareholders generally realize different returns from the same merger, some losing money and others gaining. This conflict of interest is reflected in the mutual fund voting behavior: In mergers with negative acquirer announcement returns, cross-owners are significantly more likely to vote for the merger.
Nonsynchronous trading of securities introduces into the market model a potentially serious econometric problem of errors in variables. In this paper properties of the observed market model and associated ordinary least squares estimators are developed in detail. In addition, computationally convenient, consistent estimators for parameters of the market model are calculated and then applied to daily returns of securities listed in the NYSE and ASE.
We explore the history of mergers and acquisitions made by individual CEOs. Our study has three main findings: (1) CEOs' first deals exhibit zero announcement effects while their subsequent deals exhibit negative announcement effects; (2) While acquisition likelihood increases in the performance associated with previous acquisitions, previous positive performance does not curb the negative wealth effects associated with subsequent deals; (3) CEOs' net purchase of stock is greater preceding subsequent deals than it is for first deals. We interpret these results as consistent with self-attribution bias leading to overconfidence. We also find evidence that the market anticipates future deals based on the CEO's acquisition history and impounds such anticipation into stock prices.
This paper examines properties of daily stock returns and how the particular characteristics of these data can affect event study methodologies. We find no evidence that either nonnormality in the time-series of daily excess returns or bias in OLS estimates of Market Model parameters affect the specification or power of tests for abnormal performance. However, under plausible conditions, both autocorrelation in excess returns and changes in the variance of daily returns conditional on an event can affect the tests; simple procedures to deal with these issues are sometimes quite useful. We also show that taking into account dependence in the cross-section of the daily excess returns can be harmful, resulting in tests with relatively low power and which are no better specified than those which assume independence.
This paper investigates the relationship between the reputation of investment banks employed in mergers and acquisitions transactions and the resulting wealth effects. Two hypotheses are tested: the superior deal hypothesis, stating that high reputation advisors suggest deals with higher overall transaction gains; and the bargaining advantage hypothesis, stating that the larger share of transaction benefits is attributed to the party employing a highly reputed advisor. Evidence from 285 European M&A-transactions announced between 1997 and 2002 does not support any of these hypotheses. On average, wealth effects are not significantly different for transactions advised by different advisor tiers.
This paper empirically investigates the antecedents of growth through mergers and acquisitions (M&As) in a typical continental European country, Belgium. The article reports on a study using data on 484 private and listed bidders engaging in 990 M&As during 1997-2007, and matches this sample with companies that did not pursue any external growth. By analyzing firm characteristics, industry, and aggregate financial market variables, the study can also discern the motives that are important in the decision to acquire. The results show that neither the firm's cash position nor its cash-generating abilities influence its choice to grow externally. Yet, intangible assets affect the M&A decision positively, whereas ownership concentration and bank loans have a negative effect. In industries where incumbents are operating at a lower scale and in more highly concentrated industries, the odds of firms participating in M&As are larger. Industry deregulation, industry growth, and financial market conditions have no influence. These findings are largely comparable across listed and private firms. Yet, the data do reveal that the operating scale of industry incumbents and industry concentration matter only in horizontal and domestic takeover decisions.
The paper examines the impact of ownership structure on company economic performance in 435 of the largest European companies. Controlling for industry, capital structure and nation effects we find a positive effect of ownership concentration on shareholder value (market-to-book value of equity) and profitability (asset returns), but the effect levels off for high ownership shares. Furthermore we propose and support the hypothesis that the identity of large owners --family, bank, institutional investor, government, and other companies-- has important implications for corporate strategy and performance. For example, compared to other owner identities, financial investor ownership is found to be associated with higher shareholder value and profitability, but lower sales growth. The effect of ownership concentration is also found to depend on owner identity
In a corporation with many small owners, it may not pay any one of them to monitor the performance of the management. We explore a model in which the presence of a large minority shareholder provides a partial solution to this free-rider problem. The model sheds light on the following questions: Under what circumstances will we observe a tender offer as opposed to a proxy fight or an internal management shake-up? How strong are the forces pushing toward increasing concentration of ownership of a diffusely held firm? Why do corporate and personal investors commonly hold stock in the same firm, despite their disparate tax preferences?
We propose that dispersed outside ownership and the resulting managerial discretion come with costs but also with benefits.
Even when tight control by shareholders is ex post efficient, it constitutes ex ante an expropriation threat that reduces
managerial initiative and noncontractible investments. In addition, we show that equity implements state contingent control,
a feature usually associated with debt. Finally, we demonstrate that monitoring, and hence ownership concentration, may conflict
with performance-based incentive schemes.
Existing research shows that significantly more acquisitions occur when stock markets are booming than when markets are depressed.
Rhodes-Kropf and Viswanathan (2004) hypothesize that firm-specific and market-wide valuations lead to an excess of mergers, and these will be value destroying.
This article investigates whether acquisitions occurring during booming markets are fundamentally different from those occurring
during depressed markets. We find that acquirers buying during high-valuation markets have significantly higher announcement
returns but lower long-run abnormal stock and operating performance than those buying during low-valuation markets. We investigate
possible explanations for the long-run underperformance and conclude it is consistent with managerial herding.