Family ownership, leverage and acquiring firm
performance of Canadian companies
Author: N.S. van der Wel
Student-number: 6050344
Institution: University of Amsterdam
Program: BSc. Economics and Business
Specialization: Finance & Organization
Field: Corporate Finance
Supervisor: Dr. Evgenia Zhivotova
Date: 31-01-2018
Statement of originality
This document is written by student Nanniek van der Wel, who takes full responsibility for the contents of this document. I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in its creation. The Faculty of Economics and Business is responsible solely for the supervision of the completion of the work and not for its contents.
Abstract
This paper investigates whether the stock market reacts differently to the announcement of mergers and acquisitions (M&As) undertaken by family-owned firms versus non-family-owned firms. This study also analyzes the interaction effect of leverage on this relationship. The sample consists of 162 M&As undertaken by Canadian-listed companies over the period 2001-2016. The stock market reaction is measured using the three days’ cumulative abnormal return (CAR). The results of this paper reveals a positive relationship between family ownership and acquirer's abnormal returns. Moreover, leverage has a negative interaction on the relationship between family ownership and acquirer's abnormal returns. This means that the positive effect of family-owned companies on abnormal return decreases when acquiring firms are highly levered. Overall, the results indicate a more positive stock market reaction after the announcement of a M&A when this announcement is undertaken by family-owned company instead of a non-family-owned company. Together, these results support the alignment theory, the debt-monitoring hypothesis and the underinvestment hypothesis.
Table of contents
1. Introduction ... 5 2. Related literature ... 7 2.1. Relationship between family ownership and stock market reactions around the announcement of M&As ... 7 2.2. Relationship between leverage and stock market reactions around the announcement of M&As ... 9 2.3. Interaction effect of leverage on the relationship between family ownership and stock market reactions around the announcement of M&As ... 10 3. Data description ... 10 3.1. Data selection ... 11 3.2. Regression analysis ... 11 3.3. Dependent variable ... 11 3.4. Independent variables ... 12 3.5. Control variables ... 13 3.6. Descriptive statistics and correlations ... 13 4. Results ... 15 4.1. Family ownership and acquirer’s CARs ... 16 4.2. Leverage and acquirer’s CARS ... 16 4.3. Leverage as the interaction variable ... 17 4.4. Control variables and CARs ... 17 4.5. Robustness check ... 17 5. Discussion and conclusion ... 23 5.1. Conclusion ... 23 5.2. Limitations ... 24 5.3. Suggestions for further research ... 26 6. References ... 27 Appendices ... 311. Introduction
The increase of mergers and acquisitions over recent decades shows the importance of mergers and acquisitions (M&As) as growth strategies for businesses (Granata & Chirico, 2010). Despite the importance and popularity of M&As, however, it remains unclear which determinants cause mergers or acquisitions to fail or succeed (Cartwright & Schoenberg, 2006). Moreover, as proven by extensive research, family firms represent a large portion of public and private firms around the world (André et al., 2014). However, although understanding the determinants of M&As is important for creating value in businesses, and despite the fact that a large portion of businesses are family-owned, little research has analyzed the relationship between family-owned companies and M&A performance (Worek, 2017). According to Andrade et al. (2001), the market reaction to the announcement of M&As constitutes the best way to measure M&A performance. Therefore, this paper aims to answer the following research questions: Does the stock market react differently to the announcement of M&As undertaken by family-owned firms versus non-family-owned firms? Few prior studies have analyzed the relationship between family versus non-family ownership of the acquirer and value creation for the acquirer firm after a deal. Furthermore, the empirical findings of these studies are contradictory (Worek, 2017). On the one hand, researchers have found a positive relationship between family firms and abnormal return or value creation of shareholders after a deal (Andre et al., 2014; Ben-Amar & André 2006; Basu et al., 2009; Feito-Ruiz & Menéndez-Requejo, 2010; Bouzgarrou & Navatte, 2013). On the other hand, a number of papers have established a negative relationship between family firms and value creation for shareholders after a deal (Bauguess & Stegemoller, 2008; Gleason et al., 2014; Leepsa & Mishra, 2013), or else have shown less value creation for shareholders compared to non-family acquirers after a deal (Shim & Okamuro, 2011). Two other studies have claimed that there is no relationship between family ownership and value creation after M&As (Miller et al., 2010; Caprio et al., 2011). These mixed results show that more research is needed to ascertain and understand the real relationship between family ownership and creation for shareholders. Moreover, most of the studies that have analyzed the relationship between family-owned companies and stock market reactions take the payment method into account as an interaction or control variable. The payment method is often used as a substitute for the source of financing available for M&A (Schlingemann, 2004). However, the actual source of financing of the acquiring company has often been ignored as a variable, despite the fact that some studies have found a relationship between the actual source of financing and the stock market reactions, even when thepayment method is taken as control variable (Schlingemann, 2004; Maloney et al, 1993; Bouzgarrou & Navatte, 2013). The actual source of finance can be measured by taking the amount of debt financing before a takeover announcement (Schlingemann, 2004). However, the results of the studies that analyzed the relationship between debt of financing before a takeover announcement and market reactions are contradictory. Maloney et al. (1993), for example, showed that the amount of leverage of the acquiring firm is positively related to stock market reactions but Schlingemann (2004) found no relationship between the leverage of the acquiring firm and stock market reactions. Moreover, research by Bouzgarrou and Navatte (2013) revealed that acquirers’ leverage is not related to short-term stock market reactions, but is, negatively related to acquirers’ long-term performance. Because of these contradictory results, this study first analyzes the relationship between the amount of leverage and the stock market reactions. Afterwards, the effect of leverage on the relationship between family ownership and stock market reactions is analyzed. As such, this study contributes to the existing literature by examining the effect of leverage on the relationship between family ownership and stock market reactions. To my knowledge, no research has analyzed leverage’s interaction effect on the relationship between family versus non-family ownership of the acquirer and the acquirer’s value creation. Gaining insight into the interaction effect of leverage with family ownership of the acquiring company helps to explain if and how family-owned acquirer's M&A performance could differ from that of non-family-owned firms. Knowledge about the determinants of M&A performance helps managers and investors to improve their M&A performance which increases the value of the firm. The research questions are answered using completed M&As of listed family-owned and non-listed family-owned acquirers in Canada in 2001–2016. Research in Canada is particularly interesting due to the high level of ownership concentration by family shareholders (André et al., 2014) in contrast to other countries around the world, where there is a high degree of corporate ownership concentration (La Porta et al., 1999). To analyze whether family-owned acquirers create more value than non-family-owned acquirers after M&As, the ordinary least squares (OLS) model is employed. Stock market reaction, in this study, is defined as the three days cumulated abnormal return (CAR). Meanwhile, the leverage of the acquiring company is added as an interaction variable. The next section explains the related literature, after which the data description and the results are discussed. Finally, the conclusion and discussion are outlined.
2. Related literature
The related literature in this section is used to formulate two hypotheses that answer the research questions above. Literature about the relationship between family-owned acquirers and value creation after M&As is mentioned first, followed by literature explaining the interaction effect of leverage on the relationship between family-owned acquirers and value creation after M&As.2.1. Relationship between family ownership and stock market reactions around the
announcement of M&As
As previously mentioned, some research has found a positive relationship between family-owned firms and value creation or stock market reaction around the announcement day (Andre et al., 2014; Ben-Amar & André 2006; Basu et al., 2009; Feito-Ruiz & Menéndez-Requejo, 2010; Bouzgarrou & Navatte, 2013), while other studies have established a negative relationship (Bauguess & Stegemoller, 2008; Gleason et al., 2014; Leepsa & Mishra, 2013, Shim & Okamuro, 2011) or no relationship at all between these variables (Miller et al., 2010; Caprio et al., 2011). These results are contradictory, and prior research has used two theories to explain them: the alignment theory and the entrenchment theory. According to the alignment theory, a positive relationship exists between family ownership and market stock reactions. The alignment theory is built on the agency theory, which states that conflicts of interest exists between shareholders and managers (Jensen & Meckling, 1976). This is the case when managers are tempted to undertake acquisitions to increase their compensation and private benefits at the expense of the shareholders (Shleifer & Vishny, 1997). The alignment theory states that agency problems between managers and shareholders can be decreased or even eliminated in family-owned companies (Jensen & Meckling, 1976), however, as family-owned firms tend to possess strong incentives and resources to monitor their managers. Family members, for example, often invest a large amount of their wealth into their company (Bouzgarrou & Navatte, 2013), and because of this, the costs related to bankruptcy are relatively high, and better monitoring becomes more important. Moreover, family-owned firms often have a long-term investment horizon. Usually, their goal is to transfer their company or managerial control of the firm to the next generation (Stein, 1989). This goal frequently brings an organizational culture with such characteristics as commitment, altruism and loyalty, which can lead to better monitoring. In addition, Anderson and Reeb (2003) stated that family members have longer tenures, which allows them toacquire more knowledge about the company. If monitoring requires knowledge of a firm, family members are superior in monitoring than non-family members. Family firms thereby also often have family members in their management or on the board, which makes the agency problem less severe (Bouzgarrou & Navatta, 2013). According to the alignment theory, therefore, the increased monitoring of managers can lead to a better selection of target firms, which makes family-owned firms better acquisition decisions, resulting in higher stock market reactions around the announcement day (André et al., 2014). Another reason why a positive relationship between family-owned companies and stock market reactions can exist is because family firms tend to have more conservative management policies (Bouzgarrou & Navatte, 2013). Family firms, for example, seem to engage less frequently in M&As than non-family-owned firms, especially when their ownership concentration is not large. One reason why they engage less frequently in M&As is because M&As cause more dilution of management control (Caprio et al., 2011). In addition, it is known that family firms often have less diversified portfolios. This makes them more averse to risk than non-family-owned firms (Baugess & Stegemoller, 2008). The cautious M&A strategy of family-owned companies can lead to better acquisitions decisions, and therefore to higher stock market reactions around the announcement day (Bouzgarrou & Navatta). According to the entrenchment theory, a negative relationship exists between family ownership and market stock reactions. Meanwhile, the entrenchment theory states that large shareholders can convince managers to share private benefits at the expense of minority shareholders. Morck and Yeung (2003), for example, showed that managers may act in favor of the family firm, but not in favor of the shareholders in general. This is even clearer when the family owners are also the CEO or are on the company’s board. As such, the decisions made by family members can differ from profit maximization and can cause minority shareholders to lose money. This can eventually lead to lower stock market reactions around the announcement day. Based on these different theories and according to contradicting results of earlier research, it is possible that family-owned acquirers create as much, less or the same value as non-family-owned acquirers after M&As. This leads to the following hypotheses: Hypothesis 1: The stock market reaction around the announcement day of M&As is the same for family- and non-family-owned acquiring companies.
2.2. Relationship between leverage and stock market reactions around the announcement
of M&As
As previously mentioned, only a few papers have investigated the relationship between leverage and stock market reactions. Maloney et al. (1993) found a positive relationship, Schlingemann (2004) found no relationship and Bouzgarrou and Navatte (2013) found no relationship in the short term and a negative relationship in the long term between the amount of leverage of the acquirer and stock market reactions. These results are contradictory, and prior research has used two theories to explain them: the debt-monitoring hypothesis and the underinvestment hypothesis. On the basis of these theories and those mentioned earlier, the possible effect of leverage on this relationship is described. The debt-monitoring hypothesis, which is based on the agency theory, explains the positive relationship between leverage and stock market reactions. The debt-monitoring hypothesis states that debt can lower these agency problems between stockholders and managers. Debt reduces the free cash flows, which brings about less wastage in the firms’ resources and discourages managers from empire building (Stulz, 1990; Jensen, 1986), thereby decreasing unprofitable M&As. In addition, Grossman and Hart (1982) also observed that managers in firms work harder because of the risk of bankruptcy. When the agency costs decrease, companies make more profitable M&As, and stock market reactions increase. Thus, the debt-monitoring hypothesis demonstrates that when a company is highly leveraged, managers make more decisions that align with the interest of shareholders. In contrast, the underinvestment hypothesis explains the negative relationship between leverage and stock market reactions. The underinvestment hypothesis argues that leverage can lead to lower stock market reactions because of underinvestment problems (Stulz, 1990). Leveraged companies need to settle their debt payments, which reduces their free cash. When it is not possible to invest in positive net present value (NPV) investments due to too little free cash, this reduces the profits that can be made by M&As (Stulz, 1990). Based on the results of earlier research, the debt-monitoring hypothesis and the underinvestment hypothesis, the amount of leverage in the acquiring company can create positive, negative or neutral stock market reactions. This leads to the following hypothesis: Hypothesis 2: No relationship exists between the amount of leverage in the acquiring firm and stock market reactions around the announcement day of M&As.2.3. Interaction effect of leverage on the relationship between family ownership and stock
market reactions around the announcement of M&As
The debt-monitoring hypothesis and the alignment theory both state that reducing agency problems is important for increasing acquirers’ M&A performance. These agency problems can be reduced by having a family-owned company according to the alignment theory or by having leveraged companies according to the debt monitoring theory. Taking these theories into account, it is possible that the relationship between family-owned companies and stock market reactions is stronger when the family-owned company is highly levered. When a company is family-owned, the agency costs are already lower; hence, when the family-owned company is also highly levered, the agency costs are reduced even further. Lower agency costs can lead to even higher stock market reactions around the announcement day of M&As. Another explanation for the effect of leverage on the relationship between family ownership and performance is that the relationship between family ownership and market stock reaction around the announcement day of M&As is higher when family companies are low leveraged. When a non-family-owned company has high agency problems, high leverage can decrease those problems, and thus can have a strong effect on the market stock returns. However, when a company already has low agency problems due to having family members in the company, high leverage does not decrease the agency problems much more, and thus does not evoke a strong effect on the market stock returns anymore. Moreover, because of having more free cash flows when the leverage is low, having low leverage and being a family-owned company can even increase the stock market reactions. In this case, having low agency problems and more free cash flows can lower the underinvestment problems and can even lead to more positive net value investments. The given explanations in this section lead to the following hypothesis: Hypothesis 3: Leverage has an interaction effect on the relationship between family ownership of the acquirer and stock market returns around the announcement day of M&As.3. Data description
To test the hypotheses and answer the research questions, the data description is outlined in the following section. To acquire the data descriptions, the data selection is explained first, followed by the regression analysis utilized. Moreover, the variables that are used in the regression analysis are also discussed in more detail. Finally, the end of this section presents the final data descriptions.3.1. Data selection
To acquire longitudinal data about M&As in Canada, the Zephyr program is used first. The following search criteria are used in Zephyr: (1) All M&A information about acquirers and targets are from Canada; (2) completed and confirmed M&As all took place between 2001 and 2016; (3) the acquirer should have more than 50% of the shares of the target after the M&A; (4) the acquiring company is listed; (5) the deal value is known; and (6) only companies owned by an ultimate owner are taken into account. The information on a total of 189 M&As are found in Zephyr, of which 68 companies were owned by families (threshold of 10% ownership by individuals or families). Other information regarding the companies, such as the ISIN numbers of the acquirers and the ownership concentration, are also provided by Zephyr. However, the stock prices and the book values of the selected businesses are obtained from DataStream and Wharton WRDS (Compustat). Information used to estimate the normal returns is gathered from the website of Fama and French. When information about the stock prices of the acquiring companies is not enough, the selected company is canceled out. The final sample consists of 162 companies, of which 62 companies are family-owned and 100 are not.3.2. Regression analysis
To measure if a difference exists between family versus non-family acquirers in market reactions around the announcement of M&As, the event study methodology with the following OLS model is used: !"#$ = α + )*+,- + ./01213,41 + .5+,- ∗ 01213,41 + β8CONTROLVAR + ε These variables are explained in the following subsections.3.3. Dependent variable
To measure the stock market reaction, the cumulative abnormal return (!"#$) three days around the announcement date is used as a dependent variable. To calculate the CAR, the sum of the abnormal returns ("#$B) are considered. The abnormal return is calculated by subtracting the normal return of company i in period t (D#$B) from the return of firm i on period t.!"#$ = "#$B B E F BEGF where
"#
LM= #
LM− D #
LM The normal return is estimated using the Fama and French (1996) three factor model. This model is often used in related research as a benchmark model: #$B − #OB = P$+ Q$ (#SB− #OB) + T$UVWB+ ℎ$YVZB+ [$B Small minus big (SMB) is the difference in return between a portfolio consisting of small companies and a portfolio consisting of large companies. Meanwhile, high minus low (HML) is the difference in return between a portfolio consisting of companies with a high book-to-market ratio and a portfolio consisting of companies with a low book to-market-ratio. In the formula below, #$B is the return of firm i in period t; #OB is the risk-free rate of return; and #SB is the return of the market index. In this study, the normal return for company i in period t (D#$B) is calculated over an estimation window of 260 days prior to the announcement day and is denoted as follows: D#$B = #OB+ Q\ (#SB − #OB) + T\UVWB+ ℎ\YVZB3.4. Independent variables
The most important independent variable in this study is family ownership (FAM). La Porta et al. (1999) defined a family-owned company as one where 10% of the company’s shareholders are family members or individuals. According to them, shareholders have significant control in the firm when their ownership exceeds 10%. According to the theories previously discussed, a relationship could exist between the type of ownership and abnormal returns. Another independent variable in this study is the interaction variable leverage, which is the leverage of the company multiplied by the family ownership (FAM*LEV). According to the theories presented in Section 2, leverage could have an interaction effect on the relationship between family ownership and abnormal returns. Therefore, leverage is also used as an independent variable, as theories in Section 2 further claim that a relationship may exist between the leverage of the company and abnormal returns.
3.5. Control variables In addition to dependent and independent variables, the following control variables are taken into account: 1. The size of the acquiring (SIZE). Moeller et al. (2004) asserted that a negative relationship exists between the size of the acquirer and abnormal returns. Large shareholders seem to pay higher premiums and make more acquisitions that destroy value. Therefore, a negative relationship between the size of the acquiring firm and abnormal return is expected (Bouzgarrou & Navatte, 2013).
2. Deal value (DEAL VALUE). Benou and Madura (2005) found a positive relationship between relative transaction size and acquirer abnormal return. The results of the study conducted by Asquith et al. (1983) show that it is easier to observe positive abnormal returns from larger targets than from smaller targets. Thus, a positive relationship between deal value and the acquirer’s abnormal returns is likely. 3. Method of payment (CASH). When a company makes the announcement that the merger or acquisition will be paid in shares, the shareholders of the acquiring firm often consider this to be a negative signal. In their opinion, this is a sign that their shares are overvalued, which makes them want to sell their shares. This promotes a decrease in the share price when the M&A is announced (Feito-Ruiz & Menéndez-Requejo, 2010). In contrast, payment in cash has been found to have a positive relationship with abnormal returns (Travlos, 1987; Sudarsanam & Mahate, 2003). Hence, a positive relationship between payment of cash and abnormal returns is presumed. 4. Related businesses (INDUSTRY). This variable is measured by examining the four-digit standard industrial classification (SIC) code. When the four-digit SIC code of the acquirer and the target are the same, the variable INDUSTRY is awarded a value of zero. If the acquirer and the target have different SIC codes, the variable INDUSTRY receives a value of one (Haleblian et al., 2009). Lang et al. (1994) stated that if the acquiring and the target firm have the same main activities, it is more likely that synergies are achieved, so more value can be created, and thus higher abnormal returns (Datta et al., 1992; Ben-Amar & André, 2006) can be anticipated.
3.6. Descriptive statistics and correlations
Before discussing the results of the statistical analysis, the description of the data is presented. Table one presents the summary statistics of the observations, means, minimum and maximum values, andstandard deviations of these variables. Table two shows the correlation coefficient between the different variables.
Table 1. Summary statistics of dependent, independent and control variables.
Var. Obs Mean SD Min Max
FAM OWN
162 0.38 0.49 0 1
All Fam Non All Fam Non All Fam Non All All
CUMAB3 162 62 100 -0.01 0.03 -0.03 0.18 0.22 0.13 -1.01 1.58 LEVER 140 52 88 0.19 0.19 0.19 0.21 0.18 0.23 0 .70 FAM*LEV 162 62 100 0.06 0.15 0 0.13 0.18 0 0 .64 PAYMENT 162 62 100 0.25 0.23 0.26 0.43 0.42 0.44 0 1 DEALV 162 62 100 4.18 3.90 4.36 0.97 0.89 0.98 1 6.85 SIZE 152 58 94 5.35 5.12 5.50 1.31 1.49 1.17 0.60 7.99 INDUS 162 62 100 0.30 0.29 0.31 0.46 0.46 0.46 0 1 This table provides the means and standard deviations for the total sample size for family-owned firms and non-family-owned firms separately (100 non-family-owned companies, 62 family-owned companies). Moreover, the first column provides the number of observations, and the last two columns provide the minimum and maximum values of the total sample size. See Appendix A for the definitions of the variables. Table 1 reveals the summary statistics for the entire sample, for the family-owned companies (accounting for 38% of the sample) and non-family-owned companies (accounting for 62% of the sample separately). At first, the average of the CAR three days around the announcement day of the M&A (-1, +1) has an average of -0,01. Moreover, the average CARs for family-owned firms is 0,03, while it is -0,03 for non-family-owned firms. A simple univariate t-test shows that family-owned firms (M = 0,03, SD = 0,03) have higher CARs than non-family-owned firms (M = -0,03, SD = 0,01). This difference is found to be significant: t (160) = -2,04, p = 0,04. Second, the average deal value for the entire sample is 4,18 (log of the deal value). The average deal value for family-owned companies is 3,90, which is lower than the average of non-family-owned companies at 4,36. A simple univariate t-test also shows that family-owned firms (M = 3,90, SD = 0,11) have lower deal values than non-family-owned firms (M = 4,36, SD = 0,10). This difference is found to be significant: t (160) = 2,99, p = 0,003). Third, the average size of the entire sample is 5,35 (which is the log of the total assets). The average size of the family-owned companies is 5,12, which is lower than the average of non-family-owned companies at 5,50. A simple univariate t-test shows that family-owned firms (M = 5,122, SD = 0,20) have a lower size than non-family-owned companies (M = 5,50, SD = 0,12). This difference is significant: t (150) = 1,73, p = 0,09).
Moreover, the average of payment of the entire sample size is 0,25, which means that most of the companies pay their M&As using payment methods other than cash or a combination of cash and other methods. Notably, only 25% of the deals are paid with cash. The industry average of the entire sample size is 0,30, which means that most companies take over acquirers in a different industry, and only 30% of the companies take over targets from the same industry. Admittedly, the leverage average of the entire sample size is 0,19, which means that companies are, on average, 19% leveraged. The table does not, however, reveal large differences in payment, industry and leverage between family- and non-family-owned companies. Simple univariate t-test confirm these results, because they do not show significant differences in leverage, payment and industry between family-owned and non-family-owned companies. Table 2. Correlations between dependent, independent and control variables.
CUMAB3 FAMOWN PAYMENT DEALV SIZE INDUS LEV FAM*LEV
CUMAB3 1 FAMOWN 0,159** 1 PAYMENT 0,030 -0,039 1 DEALV 0,058 -0,230*** 0,087 1 SIZE -0,101 -0,140* 0,209*** 0,643*** 1 INDUS 0,040 -0,021 0,028 0,093 0,100 1 LEV 0,023 -0,012 0,214*** 0,364*** 0,475*** -0,052 1 FAM*LEV 0,044 0,544*** -0,051 0,092 0,219*** -0,005 0,390*** 1 See Appendix A for the definitions of the variables. Note that ***, ** and * denote statistical significance levels at the 1%, 5% and 10% levels, respectively. The correlation matrix is used to test whether multicollinearity exists among the different variables (see Table 2). This matrix reveals that no such multicollinearity exists; the highest correlation between the variables is between size and deal value, which is 0,643. Farrar and Glauber (1967) set the multicollinearity threshold at a correlation of 0.8. In this regard, this model meets the assumption of multicollinearity.
4. Results
The previous section described the method employed to answer the research questions. Accordingly, this section presents the results of the statistical analysis. Table 3 shows the regression coefficient and the p-values of the different models.4.1. Family ownership and acquirer’s CARs
Model 1 shows the results for hypothesis one, which tests the relationship between family-owned firms and stock market reactions with the control variables included (see Table 3). The results (Q= 0,074, p-value = 0,046) demonstrate a significant positive relationship between family-owned companies and acquirers’ CARs. The coefficient is significant on a two-tailed 5% significance level. This result is in line with the research of Andre et al. (2014), Ben-Amar and André (2006), Basu et al. (2009), Feito-Ruiz and Menéndez-Requejo (2010), and Bouzgarrou and Navatte (2013), whom also found a positive relationship between family-owned firms and value creation for the acquirer. Moreover, these results correspond with the agency theory. Table 3. Results of OLS regression of acquirer's CARs with event window (-1,+1) around the announcement day of the M&As on family ownership and firm characteristics. Model 1 Model 2Coefficient p-value Coefficient p-value
FAMOWN 0,074 (0,037) 0,046** 0,089 (0,048) 0,065* PAYMENT 0,032 (0,019) 0,096* 0,008 (0,019) 0,663 DEALV 0,043 (0,020) 0,035** 0,031 (0,021) 0,149 SIZE -0,033 (0,016) 0,041** -0,030 (0,025) 0,224 INDUS 0,018 (0,045) 0,687 0,046 (0,043) 0,287 LEV 0,089 (0,053) 0,094* FAM*LEV -0,150 (0,077) 0,054* Observations 152 140 Adj. R-square 0,074 0,075 Model 1 shows the relationship between family ownership and acquirer’s CAR. Model 2 establishes the interaction effect of leverage on the relationship between family ownership and cumulative return. The sample consists of M&As undertaken by Canadian acquiring firms between January 2001 and January 2016 for completed deals. Announcement period acquirer’s CARs are cumulated over (-1, +1), where day 0 is the day when the first announcement is made. Market models are estimated between -260 and -40 days. See Appendix A for the definitions of the variables. Note that ***, **, * denote statistical significance levels at 1%, 5% and 10%, respectively.
4.2. Leverage and acquirer’s CARS
Model two shows the results of hypothesis two, which tests the relationship between leverage stock market reaction along with the control variables included (see Table 3). The results (Q= 0,089, p-value = 0,065) again show a significant positive relationship between leverage and acquirers’ CARs.The coefficients is significant on a two-tailed 10% significance level. This finding is consistent with the results of Maloney et al. (1993), who observed that companies with higher leverage have more positive stock market reactions than non-leveraged companies. Moreover, these results correspond with the debt-monitoring hypothesis mentioned previously.
4.3. Leverage as the interaction variable
Model two also shows the results of hypothesis three, which tests the interaction effect of leverage on the relationship between family ownership and stock market reaction, along with the control variables included (see Table 3). These findings (Q= -0,150, p-value = 0,054) demonstrate a negative interaction effect of leverage on this relationship. This coefficient is significant on a two-tailed 10% significance level. This means that the relationship between family ownership and market stock reaction around the announcement day of M&As is weaker when family companies are highly leveraged. This is in line with the agency theory mentioned previously.4.4. Control variables and CARs
Both models also show the coefficient and p-values of the control variables (see Table 3). Model one exhibits a positive relationship between payment of the M&A in cash and acquirers’ CAR (Q=0,032, p-value = 0,096), which is in line with the expectations. Model one also indicates a significant positive relationship between the deal value and acquirers’ CAR (Q=0,043, p-value = 0,035), which also corresponds with the expectations. Moreover, a significant negative relationship is found between the size of the acquiring firm and the acquirer’s CAR (Q= -0,033, p-value = 0,041), which is also consistent with the expectations. The results, however, do not show a significant positive relationship between similarity of business between acquiring and target companies and the acquirer’s CAR (Q= 0,018, p-value = 0,687), and this does not match expectations. Furthermore, when analyzing model two, the control variables are no longer significantly related to the acquirer’s CAR anymore. The leverage of the firm and the interaction variable of leverage, as well as family ownership, seem to be more important in explaining the acquirer’s CAR than the control variables.4.5. Robustness check
The first robustness check concerns the measurement of acquirer's CARs. In this study the acquirer's CAR is measured in the (-1,+1) event window around the deal announcement. In this section, CARsare also calculated using different event windows, respectively: (-2,+2), (-3,+3), (-4,+4) and (-5,+5), which are presented in Table 4. The results (Q= 0,074, p-value = 0,168) indicate that acquirer's CARs with an event window of (-2,+2) are not significantly related to family ownership and that leverage does not have an effect on this relationship (Q= 0,141 and p-value = 0,141). However, the acquirer's CARs with event windows of (-3,+3) and (-4,+4) are significant related to family ownership (Q= 0,082, p-value = 0,088 ; Q= 0,084, p-value = 0,069), just as the interaction variables (Q= -0,170, p-value = 0,079 ; Q= 0,189, p-value = 0,084). Moreover, the results (Q= 0,000, p-value = 0,997) show that the acquirer's CARs with an event window of (-5,+5) are not significantly related to family ownership, neither the interaction variable (Q= -0,009, p-value = 0,957). As such, the relationship between acquirer's CARs and family ownership differ when different event windows are used.
Table 4. Results of OLS regression of acquirer's CARs with different event windows around the announcement day of the M&As on family ownership and
firm characteristics.
CAR (-2, +2) CAR (-3,+3) CAR (-4,+4) CAR (-5,+5)
Model 1 Model 2 Model 1 Model 2 Model 1 Model 2 Model 1 Model 2
coef. p-value coef. p-value coef. p-value coef. p-value coef. p-value coef. p-value coef. p-value coef. p-value
FAM OWN 0,065 (0,040) 0,109 0,074 (0,053) 0,168 0,060* (0,036) 0,093* 0,082 (0,048) 0,088* 0,063 (0,036) 0,079* 0,084* (0,046) 0,069* -0,006 (0,047) 0,897 -0,000 (0,062) 0,997 PAY- MENT 0,019 (0,021) 0,367 -0,007 (0,021) 0,728 0,007 (0,021) 0,749 -0,021 (0,022) 0,331 0,006 (0,024) 0,803 -0,017 (0,026) 0,504 -0,001 (0,028) 0,983 -0,019 (0,030) 0,523 DEALV 0,030 (0,025) 0,224 0,012 (0,025) 0,625 0,030 (0,021) 0,151 -0,015 (0,022) 0,493 0,031 (0,021) 0,147 0,016 (0,022) 0,481 0,004 (0,027) 0,881 -0,005 (0,028) 0,864 SIZE -0,037 (0,018) 0,049* -0,029 (0,027) 0,289 -0,040 (0,017) 0,021** -0,034 (0,024) 0,158 (0,017 -0,033 0,057* -0,025 (0,023) 0,277 -0,052 (0,021) 0,015** -0,061 (0,034) 0,076* INDUS 0,029 (0,050) 0,564 0,058 (0,048) 0,227 0,011 (0,042) 0,796 0,034 (0,042) 0,425 0,002 (0,041) 0,955 0,028 (0,042) 0,509 0,010 (0,051) 0,847 0,040 (0,050) 0,428 LEV 0,112 (0,064) 0,084* 0,119 (0,067) 0,079* 0,137 (0,077) 0,077* 0,106 (0,088) 0,231 FAM* LEV -0,141 (0,095) 0,141 -0,170 (0,096) 0,079* -0,189 (0,109) 0,084* -0,009 (0,159) 0,957 Obs. 152 140 152 140 152 140 152 140 Adj. R-square 0,062 0,060 0,075 0,065 0,056 0,046 0,072 0,084 Model 1 shows the relationship between family ownership and acquirer’s CAR. Model 2 establishes the interaction effect of leverage on the relationship between family ownership and acquirer's CAR. The sample consists of M&A's undertaken by Canadian acquiring firms between January 2001 and January 2016 for completed deals. Announcement period acquirers’ CARs are cumulated over (-2, +2), (-3,+3), (-4,+4) and (-5,+5) where day 0 is the day when the first announcement is made. Market models are estimated between -260 and -40 days. See Appendix A for the definitions of the variables. Note that *, ** and ** denote statistical significance levels at the 1%, 5% and 10% levels, respectively.
More results regarding the M&A performance of both family-owned and non-family-owned companies are shown in the figures below. Figure one shows a graph with the average stock return of family- and non-family-owned companies in the event window (-5,+5). The difference between the average acquirer's stock return of family-owned and non-family-owned companies is the highest between one day before and two days after the announcement of the M&A. The average acquirer’s stock return of family-owned-companies is higher than the average' acquirer's stock of non-family-owned firms in this time-period. However, two days after the announcement, the average acquirer's stock returns of non-family-owned companies starts to exceed that of family-owned companies. Fig 1. Average acquirer's stock return in the (-5 +5) event window around the announcement day of M&As of family-owned and non-family owned companies. The sample consists of 162 M&As undertaken by Canadian acquiring companies between January 2001 and January 2016 for completed deals (100 non-family-owned companies and 62 family-owned companies). Day 0 is the day when the first announcement is made. Figure two details the graph with the average acquirer's abnormal return of family- and non-family-owned firms in the event window (-5,+5). In accordance with figure one, this graph shows that the difference between family-owned and non-family-owned companies average acquirer's abnormal return is the highest between one day before and one day after the announcement. Family-owned-companies have higher average acquirer's abnormal return around the announcement day than non-family-owned companies. Two days after the announcement, the average abnormal return of non-family-owned companies exceeds the average abnormal return of family-owned companies. St oc k re tu rn Day
Fig 2. Average acquirer's abnormal return in the (-5 +5) event window around the announcement day of the M&A of family-owned and non-family-owned companies. Day 0 is the day when the first announcement of the M&A is made. The sample consists of 162 M&As undertaken by Canadian acquiring companies between January 2001 and January 2016 for completed deals (100 non-family-owned companies and 62 family-owned companies). The abnormal returns are computed as the difference between the returns of the firm and the normal returns. The normal return is estimated between -260 days and -40 days using the Fama and French (1996) three factor model. Figure three presents a graph with the average cumulative abnormal returns of family- and non-family-owned firms in the event window (-5,+5). This graph shows that the average cumulative abnormal return for non-family owned companies decreases between five days before the announcement and 4 days after the announcement. The average cumulative abnormal return of family-owned companies is however increasing between one day before the announcement and two days after the announcement and decreases after the second day after the announcement day of the M&A. -0,02 -0,015 -0,01 -0,005 0 0,005 0,01 0,015 0,02 0,025 -5 -4 -3 -2 -1 0 1 2 3 4 5 Non-Fam Fam AR Day
Fig 3. Average acquirer's cumulative abnormal return in the (-5 +5) event window around the announcement day of the M&A of family-owned and non-family-owned companies. Day 0 is the day when the first announcement of the M&A is made. The sample consists of 162 M&As undertaken by Canadian acquiring companies between January 2001 and January 2016 for completed deals (100 non-family-owned companies and 62 family-owned companies). The abnormal returns are computed as the difference between the returns of the firm and the normal returns. The normal return is estimated between -260 days and -40 days using the Fama and French (1996) three factor model. In summary, the three figures show the differences in stock returns, abnormal returns and cumulative abnormal returns between family-owned and non-family-owned companies for different days around the announcement. These findings explain the differences in the relationship between family ownership and acquirer's CAR when using different event windows. The second robustness check concerns the outliers. In this study, no outliers are deleted, because the abnormal returns are the true values. However, when outliers with a threshold of two standard errors are assumed, two outliers can be deleted. If the outliers are deleted, the results are even stronger. Accordingly, when analyzing the relationship between family ownership and abnormal returns, a positive relationship with a beta of 0.0513 with a p-value of 0,014** is found. Meanwhile, in terms of the interaction effect of leverage on this relationship, there is a significant relationship between family ownership and abnormal returns with a beta of 0,0584 and a p-value of 0,021**. Moreover, the interaction variable of leverage on this relationship is also more significant with a beta of -0,1487 and a p-value of 0,019**. The third robustness check focuses on the definition of family ownership. In this study, a company is seen as family owned when family members own at least 10% of the shares of the company. However, to check if the results are robust, another definition is used. According to Ben-Amar and Andre (2006), a company is family owned when the largest shareholder is a family member. To identify all the companies whose largest shareholder is a family member, the direct ownership concentration is used. If the largest shareholder is a family member, the company is noted -0,06 -0,05 -0,04 -0,03 -0,02 -0,01 0 0,01 0,02 0,03 -5 -4 -3 -2 -1 0 1 2 3 4 5 Non-Fam Fam CA R Day
as a family-owned company. Taking this sample into account, the results of the regression show a weaker but still significant relationship between family ownership and abnormal returns (!=0,0750 and p-value = 0,08*) in comparison to using the 10% ownership definition used previously (!=0,0737 and p-value = 0.046**) (see Table 5). This is in line with the research of Andre et al., (2014), which identified a nonlinear relationship between family ownership and abnormal return. The relationship decreased at higher levels of ownership, but remained overall positive. Table 5. Results of OLS regression of acquirer's CARs with event window (-1,+1) around the announcement day of the M&As on family ownership and firm characteristics, with family ownership defined as a company whose largest shareholder is a family member Model 1 Model 2
Coefficient p-value Coefficient p-value
FAMOWN 0,075 (0,043) 0,080* 0,121 (0,066) 0,071* PAYMENT 0,031 (0,020) 0,118 0,003 (0,021) 0,878 DEALV 0,039 (0,019) 0,045** 0,027 (0,020) 0,182 SIZE -0,035 (0,017) 0,047** -0,031 (0,025) 0,223 INDUS 0,020 (0,046) 0,661 0,048 (0,043) 0,271 LEV 0,099 (0,059) 0,098* FAM*LEV -0,252 (0,113) 0,027** Observations 152 140 Adj. R-square 0,072 0,089 Model 1 shows the relationship between family ownership and acquirer’s CAR. Model 2 establishes the interaction effect of leverage on the relationship between family ownership and cumulative return. The sample consists of M&As undertaken by Canadian acquiring firms between January 2001 and January 2016 for completed deals. Announcement period acquirer’s CARs are cumulated over (-1, +1), where day 0 is the day when the first announcement is made. Market models are estimated between -260 and -40 days. See Appendix A for the definitions of the variables. Note that *, ** and ** denote statistical significance at the 1%, 5% and 10% levels, respectively.
5. Discussion and conclusion
5.1. Conclusion
This study investigates the effect of family ownership on the stock market reactions surrounding mergers announcements. The results of this study reveal a more positive stock market reaction following the announcement of an M&A when this announcement is undertaken by a family-owned firm instead of a non-family-owned firm. These findings provide evidence for the alignment theory,namely, that family-owned companies experience less agency problems, thereby improving merger and acquisition decisions. The results of previous studies that observed higher value creation when the M&As are undertaken by family-owned companies instead of non-family-owned companies are thereby affirmed. Adding to the family business literature, the results of this study show that leverage affects the relationship between family-owned acquirers and acquirers’ M&A performance. The gains of family ownership in M&A performance increase when the leverage of the acquiring company is low and the gains of family ownership in M&A performance decrease when the leverage of the acquiring company is high. This result supports the debt-monitoring hypothesis and the underinvestment hypothesis. Both family ownership and debt decreases agency costs in companies; however, having family members in the company and high leverage does not result in even more positive stock reactions. Moreover, when a family-owned company has low leverage and thus high cash flows it will decrease the underinvestment problem and therefore even increase M&A performance. These findings contribute to a better understanding of how family-owned companies affect firm performance, namely by reducing agency problems. These findings are also of interest to companies and managers. Agency problems do arise and do have impact on the performance of M&As. Two ways to decrease agency problems is by increasing the leverage of the company or having family-members in the company. However, having high leverage could also lead to the underinvestment problem and therefore lowering M&A performance. The results of this study indicate that having family-members in the company and having low leverage is related to the highest M&A performance. In addition, given that leverage has an effect on the relationship between family-owned companies and performance, leverage should also be taken into account by future research related to this topic, as prior research related to family ownership and acquiring M&A performance has not taken leverage into account (André et al., 2012; Ben-Amar & André, 2006; Craninckx & Huyghebaert, 2015; Basu et al., 2009; Feito-Ruiz & Menéndez-Requejo, 2010).
5.2. Limitations
The first limitation involves the definition of family ownership used in this study. Villalonga and Amit (2006), for example, showed that the definition of family ownership is important when studying the company’s performance. They state that three elements—ownership, control and management—are fundamental. Miller et al. (2007) also made distinctions among the level of ownership and voting control of family-owned firms, the number of managerial roles in the companies, and the generationof family ownership. Future research can make distinctions in these definitions of family ownership when analyzing the relationship between family ownership and performance and the interaction effect of leverage. The second limitation of this study involves the sample size. In this research, 162 M&As are taken into account, of which, 62 acquisitions are performed by family-owned companies. Although some related studies have also gathered a sample size of approximately 150 or lower (Achleitner et al., 2010; Bae et al, 2002; Bernini et al., 2014; Feito-Ruiz et al., 2016; Klasa, 2006), this sample size is relatively small. In this study, a positive relationship is found between family ownership and three days’ CAR; however, the results found in this study are weaker compared to the research of Andre et al., (2014) who found a significant relationship between Canadian family ownership and acquirers’ CAR with a 1% significant level. The insignificant result between family ownership and five days’ CAR can also be the result of this relatively small sample size. Another limitation of this study is its generalizability. The sample of this study consists solely of Canadian acquirers and targets, and thus the results may not be generalizable to other countries. Feito-Ruiz and Menéndez-Requejo (2010) and Ben-Amar and André (2006) stated, for example, that the legal entity of the acquirer and target affects the relationship between family ownership and stock market reactions. They found a stronger relationship if the acquirer is established in a country with a strong legal environment and the target is established in a country with a weak legal environment. When the target firm is established in a weaker legal environment, it is likely that there are more undervalued targets and less competition. This can lead to better stock market returns when acquiring these firms in weak legal environments (Worek, 2017). Thereby, future research should replicate this study in different legal environments to determine whether the results found in this study are generalizable to different countries. Moreover, this study analyzed the short-term market reactions to M&A announcements, but post-merger long-term performance after M&As of family- and non-family-owned acquirers is not analyzed. As shown in figure two, the difference in average acquirer's abnormal return between family-owned and non-family-owned companies is the highest between one day before and one day after the announcement. Three days after the announcement the difference between average acquirer's abnormal return of family-owned and non-family-owned companies is low. As such, although family-owned-companies outperform non-family-owned firms in the short-term, non-family-owned companies can still outperform family-owned-firms in the long run. For example, Shim and Okamuro (2011) demonstrated that family-owned firms have lower after-merger performance than non-family-owned firms. However, Bouzgarrou and Navatte (2013) observed that family firms do outperform non-family-owned firms in long-term performance. As such, an extension to this
paper can analyze the long-term market and operating performance of family- and non-family-owned acquirers after M&As.
5.3. Suggestions for further research
One suggesting for future research is to take into account the generation of the family members in the family firm as a moderator factor. Miller and Le Breton-Miller (2006) stated, for example, that as generations progress, the likelihood of family conflicts increases, which is associated with decreases in financial performance and the growth of the company. Therefore, it is possible that an interaction effect of the generation of the family members exists in the relationship between family ownership and acquirers’ performance of M&As. Another suggestion for future research is to examine acquirers’ performance of M&As when both the acquiring and the target companies are family owned. Most research about family ownership and M&A performance has examined family ownership only from the acquirer’s side. A few studies about family ownership and M&A performance have analyzed family ownership from the seller’s side (Huang et al., 2014; Granata and Chirico, 2010; Goossens et al., 2008; Gonenc et al., 2013). Gonenc et al. (2013), for example, observed that the acquirer’s gains of M&As are lower when they acquire family-owned targets as compared to non-family targets. However, it is possible that the stock market reacts more positively when a family-owned company acquirers another family-owned target. Larrson and Finkelstein (1999) found, for example, that similarity of management style, defined as the degree to which managers in the organization have the same ideas about risk-taking, authority and structure, affects synergy realization. As previously mentioned, family firms are a unique group of companies that value such characteristics as commitment, altruism and loyalty (Stein, 1989). Family-owned companies also possess a long-term vision, because they often want to transfer the company of managerial control to the next generation (Anderson & Reeb, 2003). When both the acquirer and target firms are family owned, management style similarity is more likely, and consequently, so is the likelihood that interaction and coordination will take place, both of which are important for M&A performance.6. References
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