Master Thesis, MSc International Financial Management University of Groningen, Faculty of Economics and Business
The effect of European listed family firms on long-term acquisition performance
ABSTRACT
This study examines the effect of family ownership on acquisition performance of listed European firms. Using market-adjusted buy-and-hold returns I found that family firms do not perform better than non-family firms irrespectively of their legal origin, and that they destroy value in industry diversifying acquisitions. The dataset consists out of 61 family firms and 121 non-family firms, drawn from the Zephyr and Orbis databases.
Key words: family firms, M&A, diversification, legal-origin
1. INTRODUCTION
Europe accounted for almost a third of the total global deal market in the first quarter of 2017, up 16% compared to 2016 (Financial times, 2017). Factors that are used to explain this increase are political stability, relatively cheap financing, and steady growth. However, these broadly researched macroeconomic trends only explain partially what drives the interest of European firms to acquire. To get a more comprehensive understanding what drives these corporate decisions to acquire, firm-specific factors need to be considered as well. Previous research (Faccio and Lang, 2002; Andres, 2008; Barontini and Caprio, 2006) show the relevance of family ownership structures in Europe. However, the current European mergers & acquisitions (M&A) literature still treats family firms homogeneous to non-family firms, even in a market where family firms account for around 50% of the European GDP (EFB, 2017).
Adhikari and Sutton (2016) examined the post-M&A performance of family firms, and found in their sample of S&P 500 firms that family firms outperform non-family firms after a merger or acquisition. They left a research gap by not addressing the effects of cross-border M&A by family firms. This paper tries to answer the question whether family ownership is an effective organizational structure for listed firms throughout Europe. This is emphasized in the research question: Do listed family firms in Europe perform better than non-family firms? Effectiveness of family ownership will be studied through the post-acquisition performance of family versus non-family firms. M&A is an adequate approach to study these agency problems, as it involves large corporate decisions where management and majority shareholders both have dispersed incentives and can both heavily influence the decision-making process (Chen et al., 2007). I study a sample of 185 acquiring family and non-family firms over the period 2009-2013, with a deal value of at least €100 million, located in continental Europe, UK and Ireland. This sample also gives an avenue in testing whether governance factors such as legal origin have any effect on M&A performance.
The findings of this paper indicate that there is no evidence found that family firms perform better than non-family firms in Europe, or that family firms perform better in stakeholder oriented countries. Furthermore, other results of the paper indicate that family firms destroy value when they diversify by industry. This thesis is organized in the following way. Section 2 contains a literature review together with hypotheses. Section 3 covers data and methodology. Section 4 shows results. Section 5 discusses and section 6 concludes.
2. LITERATURE REVIEW
The following section provides an exploration of relevant literature concerning the influence of family firms on the post-acquisition performance. Section 2.1 explains the ownership characteristics of family forms. Section 2.2 explains the effect of family firm ownership on diversification by industry. Section 2.3 explains the effect of cross-border acquisitions by family firms. Section 2.4 explains the effects that legal origin has on the post-acquisition performance of family firms. And section 2.5 condenses the theory in hypotheses.
2.1 Ownership characteristics of family firms
invested in their firm, which causes that they are diversified at a non-optimum (Bauguess and Stegemoller, 2008). Considering this ownership structure, the classic agency problem should be of a smaller magnitude as families have a stronger incentive to monitor management (Demsetz and Lehn, 1985). This increased monitoring is beneficial for the firm as managers in firms with dispersed ownership have more opportunity to acquire for ill-motivated reasons. Examples include, empire creating, maximizing their utility (Morck et al., 1990), overconfidence (Malmendier and Tate, 2008). Furthermore, to remain in a position of power managers might pursue size-increasing acquisitions to defend against hostile takeovers (Gorton et al., 2009). M&A for these reasons often destroy value for the acquirer, particularly if the target is a publicly listed firm (Andrade et al., 2001). Family owners have the power to block these kinds of value destroying acquisitions. Which should be beneficial for all, majority and minority, shareholders.
However, a different type of agency problem might occur, as the major, undiversified, shareholder can create large agency conflicts between them, and the minority shareholders (Fama & Jensen, 1983). First, costs might occur if families limit the complete scope of labour competition and want to appoint family members to the board, whom might be less competent than outside professional managers (Perez-Gonzalez, 2006). Second, undiversified shareholders may benefit from different firm goals, where undiversified shareholders are more obliged to pursue goals such as firm growth, technological innovation, or firm survival, diversified shareholders just pursue firm value maximization (Anderson and Reeb, 2003). Casson (1999) states that when founding families regard firm survival as the main objective for their firm, they see their firms as a resource to pass on to their next of kin rather than resources to be consumed during their own life. This different view regarding the purpose of their resources signals that founding families have strong incentives to minimize firm risk. Risk avoidance is one of the greatest costs that major, undiversified, shareholders can impose on a firm. (Shleifer and Vishny, 2003). Third, as Caprio et al., (2011) stated, large shareholders could collude with management to gain private benefits resulting from acquisitions. Other costs may include; expropriating wealth from small investors in the form of special dividends and excessive compensation packages (Anderson & Reeb, 2003).
as tunnelling profits often takes place in non-operating segments of profit, created by M&A. If investor protection is low, majority shareholders may hold pyramid ownership structures. They divert cash from the bottom of the pyramid, where they hold large controlling stakes, to the top of the pyramid, where they hold high cash flow rights (John et al., 2008). So, if family firms acquire just to tunnel resources out of the bidding firm in benefit of the majority shareholder then future performance should be lower.
There is evidence however that the priority of family-firms is in fact shareholder maximization. As their personal wealth is highly intertwined with the firm value and therefore it is in their best interest to decrease agency problems and pursue shareholder maximization. This line of reasoning is confirmed by Robe (2002), who found that if firm value is destroyed by management of a family firm, majority shareholders emphasise more on monitoring and assurance of shareholder maximization. And thereby increasing the current majority shareholders’ wealth.
2.2 industry diversification
The relatively risk-averse attitude of family firms can be explained by the undiversified nature of their owners’ portfolio (Faccio & Lang, 2002). One risk reducing strategy is diversification of the firms’ assets (Kim et al., 2014). This can be done by diversifying across industries and/or between countries. Mitigating the portfolio risks through corporate diversification may be the right strategy for an undiversified, majority shareholder, it might however impose extra agency costs on the minority shareholders, if the portfolios of minority shareholders are already diversified at an optimum (Anderson & Reeb, 2003).
prevent firms from voting power dilution, for instance with the use of pyramid structures or dual-class shares, where equity and voting rights are separated. It is shown that in the US and UK these structures might lead to lower valuations, these lower valuations are not necessarily the same for Continental Europe (Barontini and Caprio, 2006). The use of structures that prevent voting power dilution signals that family firms do no always have to adopt a more risk-averse acquisition strategy for control reasons and can diversify their portfolio through the company’s assets, without losing voting power. However, Anderson & Reeb (2003) show that family firms do not significantly differ from non-family firms regarding their diversification strategies in the US, and that family firm ownership is less associated with corporate diversification, and find that family ownership decreases the agency costs for minority shareholders. They conclude that in the US family ownership is an effective organizational structure that appears to mitigate moral hazard conflicts. This is however measured in an environment of transparent markets with high shareholder protection.
2.3 Cross-border diversification
positive Net Present Value projects. When the expansion decision is already made, the largest agency problem that seems to influence cross-border performance is that top management in family firms might not possess the skills and knowledge needed to perform in the complex environment of a geographically scattered organization (Fernandez and Nieto, 2005) as their top management labour pool is often limited to trusted insiders (Gedajlovic et al., 2004) rather than outside managers who possess the needed international knowledge.
There are also notable arguments why internationalization might be a value-adding strategy. Diversifying cross-border could ensure long-term survival of the firm and maintain sustainability (Claver et al., 2007). Minetti et al., 2015 argue that maintain sustainability is the main reason for family firms to expand cross-border. Lumpkin and Brigham, (2011) further state that family firms will outperform non-family firms when expanding abroad because of their longer investment horizons. Furthermore, internationalization might be more effective for family firms as they often profit from their reputation and their international relations with other families (Zahra, 2003). These advantages over non-family firms help family firms to entry foreign markets with more ease and to better place their products in the foreign market (Zahra, 2003). So, if family firms employ their social capital they should create a competitive advantage over non-family firms (Sirmon & Hitt, 2003), and therefore perform better than non-family firms. However, the knowledge gap of international markets by family firms and passing up on possible positive Net Present Value cross-border investment opportunities might diminish this advantage.
2.4 Legal origin
shareholders that managers will expropriate the firms’ assets. As a result, the need for dominant shareholders to monitor decreases. (Burkart et al., 2003).
Family firms may thrive better in stakeholder oriented countries with insider financial systems, where the primary mean of financing is provided by banks, rather than the stock market, lower investor protection, and a somewhat inefficient market for corporate control (Franks et al., 2011). The need for external equity is lower as banks in insider systems refined relationship banking, and family ownership structures provide substitute control mechanisms for acquisitions (Masulius et al., 2011). Whether family control is an effective ownership structure in all circumstances is debatable as Franks et al., 2011 found that in “insider systems” such as Continental Europe family controlled firms have the same or better survival rate in high M&A intensive industries, but not in “outsider systems” such as the UK and US
2.5 Hypotheses
the long-term wealth creation for family firms after an acquisition should be better than non-family firms as family firms benefit from increased monitoring, by which they are able to limit selfish behaviour of management. It lowers the opportunity for management to acquire for ill-motivated reasons such as overconfidence (Malmendier and Tate, 2008), empire creating and utility maximization (Morck et al., 1990). Therefore, I hypothesize:
Hypothesis 1: family firms have a higher long-term post-acquisition performance than non-family firms.
Hypothesis 2a: family firms do destroy value in industrial or cross-border diversifying acquisitions.
As excessive ownership concentration could have negative consequences for minority shareholders when they are less protected by commercial law (Shleifer and Vishny, 1996), it is debatable whether family ownership is an effective organizational structure in all circumstances. Because the need for dominant shareholders decreases with the level of investor protection (Burkart et al., 2003) and family firms have a lower survival rate in high M&A intensive industries in “outsider systems” the following hypothesis is derived:
Hypothesis 3: family firms have a higher long-term post-acquisition performance in stakeholder oriented countries.
3 EMPERICAL ANALYSIS 3.1 Data
as Lyon et al., (1999) state that cross-sectional dependence is avoided by excluding overlapping returns.
3.2 Measures
independent variable
A family firm will be considered as such, if a family or an individual is the largest ultimate owner at a 25% threshold, as used in Franks et al., (2011). Previous studies, including Anderson and Reeb (2003) add an extra criterion to a family firm, namely that a family member needs to be present in a managerial position to qualify for a family firm. However, Caprio et al., (2011) argue that in a Continental European context there is no need for this extra criterion, as in the European environment of concentrated ownership, the largest shareholder often possesses the right to appoint and discharge top management, and is often the one who provides strategic direction. Furthermore, there is unambiguity at what percentage of ownership a firm should be considered family owned, ownership percentages range between 10% and 30% (Faccio and Lang, 2002; Maury, 2006; Andres, 2008; and Franks et al., 2011). As the Zephyr database only provides data regarding family ownership at the 25.01% or 50.01% threshold, I chose the 25.01% threshold to categorize a firm as a family firm as 25.01% lies well inside the mentioned bounds used in previous research.
diversification by industry is categorized as such if a firm acquires a target with a different 2-digit SIC-code. Cross-border diversification is categorized as such if a firm acquires a target in another country. Countries are either categorized as shareholder or stakeholder oriented countries. Simnett et al., (2009) provides the classification per country, where the UK and Ireland are shareholder oriented and Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, The Netherlands, Norway, Portugal, Spain, Sweden and Swiss are stakeholder oriented.
Control variables
merger or acquisition (Fuller et al., 2002), therefore I will control for payments in shares. ROA is used to control for past performance (Adhikari and Sutton, 2016). As high liquid firms tent to make value decreasing acquisitions (Harford, 1999) I control for cash holdings. And lastly, I control for leverage as in Chen et al., (2007).
3.3 Methodology
In this research, the focus lies on the long-term value impact of M&A. The multivariate analysis is the same as used in Adhikari & Sutton, (2016). The Buy-and-hold abnormal returns are calculated by;
𝐵𝐻𝐴𝑅𝑖,𝑇 = ∏𝑡=1𝑇 (1 + 𝑅𝑖,𝑡) − ∏𝑡=1𝑇 (1 + 𝑅𝑒𝑛𝑐ℎ𝑚𝑎𝑟𝑘, 𝑖, 𝑡) To test the Hypothesis, the following OLS regression will be used:
𝐵𝐻𝐴𝑅𝑖,𝑡+𝑘= 𝛼0+ 𝛽1 𝐹𝑎𝑚𝑖𝑙𝑦𝑖,𝑡+ 𝛽2 𝐷𝑖𝑣𝑒𝑟𝑠𝑖𝑓𝑦𝑖𝑛𝑔 + 𝛽3𝐶𝑟𝑜𝑠𝑠_𝑏𝑜𝑟𝑑𝑒𝑟
+ 𝛽4𝑆𝑡𝑎𝑘𝑒ℎ𝑜𝑙𝑑𝑒𝑟 + 𝛽5𝐿𝑛(𝑚𝑎𝑟𝑘𝑒𝑡𝑣𝑎𝑙𝑢𝑒)𝑖,𝑡−1+ 𝛽6𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑑𝑒𝑎𝑙𝑠𝑖𝑧𝑒𝑖,𝑡 + 𝛽7𝑃𝑢𝑏𝑙𝑖𝑐 + 𝛽8𝑆ℎ𝑎𝑟𝑒𝑠 + 𝛽9𝑅𝑂𝐴𝑖 + 𝛽10𝑙𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦𝑖 + 𝛽11𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖
+ 𝑌𝑒𝑎𝑟𝐷𝑢𝑚𝑚𝑖𝑒𝑠 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦𝐷𝑢𝑚𝑚𝑖𝑒𝑠 + 𝜀𝑖,𝑡
Ln(marketvalue): The Log of the acquirer’s market value 40 days before the acquisition. Relative dealsize: Is calculated by the deal value/market value 40 days before to the acquisition. Public: A dummy variable will be used, public = 1 if the target firm is publicly traded and
public = 0 if a target firm is not.
Shares: A dummy variable for primary payment, when the primary payment is shares the
dummy is 1, for other methods of payment the dummy is 0.
ROA: Earnings before interest and depreciation/Total Assets.
Liquidity: Liquidity is controlled for by Cash-holdings/Total Assets. Leverage: Is calculated by Debt/Equity.
4. RESULTS 4.1 Descriptive statistics
Table 1. Descriptive statistics by year, industry and country
Panel A: By Year
Year Non-family acquirers Family acquirers Total Percentage
2009 13 9 22 40.91 2010 14 15 29 51.72 2011 33 17 50 34.00 2012 40 8 48 16.67 2013 21 12 33 36.36 Total 121 61 182 33.52 Panel B: By Industry
Industry Non-family acquirers Family acquirers Total Percentage
Metal, Mining 4 1 5 2.75
Oil & Gas Extraction 6 3 9 4.95
Non-metallic Minerals, Except Fuels 1 0 1 0.55
General Building Contractors 2 1 3 1.65
Heavy Construction, Except Building 2 1 3 1.65
Food & Kindred Products 9 4 13 7.14
Apparel & Other Textile Products 0 2 2 1.10
Paper & Allied Products 5 0 5 2.75
Printing & Publishing 1 0 1 0.55
Chemical & Allied Products 22 8 30 16.48
Petroleum & Coal Products 0 1 1 0.55
Rubber & Miscellaneous Plastics 1 1 2 1.10
Stone, Clay, & Glass Products 1 1 2 1.10
Primary Metal Industries 2 1 3 1.65
Fabricated Metal Products 2 0 2 1.10
Industrial Machinery & Equipment 3 4 7 3.85
Electronic & Other Electric Equipment 12 1 13 7.14
Transportation Equipment 5 4 9 4.95
Instruments & Related Products 4 3 7 3.85
Local & Interurban Passenger Transit 1 0 1 0.55
Transportation by Air 1 0 1 0.55
Transportation Services 0 1 1 0.55
Communications 5 7 12 6.59
Electric, Gas, & Sanitary Services 6 0 6 3.30
General Merchandise Stores 1 2 3 1.65
Food Stores 1 1 2 1.10
Furniture & Home furnishings Stores 1 0 1 0.55
Eating & Drinking Places 0 1 1 0.55
Miscellaneous Retail 1 0 1 0.55
Security & Commodity Brokers 1 0 1 0.55
Insurance Carriers 3 0 3 1.65
Real Estate 6 2 8 4.40
Holding & Other Investment Offices 1 3 4 2.20
Business Services 3 4 7 3.85
Amusement & Recreation Services 0 1 1 0.55
Health Services 0 1 1 0.55
Educational Services 1 0 1 0.55
Engineering & Management Services 7 1 8 4.40
Justice, Public Order, & Safety 0 1 1 0.55
Panel C: By Country
Country Benchmark index Non-family acquirers Family acquirers Total Percentage
Austria ATX 1 1 2 1.1
Belgium BEL-20 4 2 6 3.3
Denmark OMX COPENHAGEN 1 0 1 0.55
Finland OMX HELSINKI 5 0 5 2.75
France CAC-40 20 16 36 19.78
Germany Dax-30 13 8 21 11.54
Ireland ISEQ 5 1 6 3.3
Italy FTSE MIB 3 4 7 3.85
Luxembourg FTSE ALL SHARE 1 0 1 0.55
Netherlands AEX ALL SHARE 5 1 6 3.3
Norway OSEAX 3 1 4 2.2
Portugal PSI ALL SHARE 2 2 4 2.2
Spain IBEX-35 3 4 7 3.85
Sweden OMX STOKCHOLM 8 6 14 7.69
Swiss SMI 12 5 17 9.34
UK FTSE ALL SHARE 35 10 45 24.73
Total 121 61 182 100
Panel A represents the distribution of the completion date of acquisitions by non-family firms and family firms per year. Panel B provides an overview of the primary industries of which the non-family and family firms acquired from, the percentage shows the number of firms in that industry divided by the total number of firms, industry classification is based on 2-digit SIC codes. Panel C shows the distribution of firms per country, with their benchmark indexes used. The percentage is the number of firms in that country divided by the total number of firms.
Table 2 panel A shows the mean values of the variables used in the multivariate analysis.
Notable is the difference between the mean deal value of family and non-family firms, where
family firms have a mean deal value of €904,75 million, non-family firms acquire for a mean of €1623,51 million, while the relative deal size is smaller for non-family firms. This can be explained by the total market value of non-family firms (€26982,01 million) which is
significantly higher than family firms (€8021,50 million). And, the higher BHAR for family
firms. Panel B shows the dummy variables used, where diversifying, cross-border and legal
origin are the independent dummy variables in the multivariate analysis and public target and
share are dummy control variables. A casual examination of the distribution of the independent
dummy variables show that family firms are more likely to acquire focus increasing targets
(34,4% versus 25,6% for non-family firms), tend to expend less cross-borders (54,1% versus
63,3% for non-family firms). And are less situated in shareholder oriented countries (18,1%),
Table 3. provides the results of the multicollinearity matrix. Highly correlated variables weaken the explanatory power of the regression as substantial parts of the variables overlap in explaining the dependent variable. All variables are relatively low; therefore, multicollinearity does not seem to be an issue.
Table 2. descriptive statistics
Panel A
Variable Family Non-family Difference test
BHAR 0.23 0.04 0.03 Deal value 904.75 1623,51 0.00 Relative dealsize 0.40 0,25 0.07 Market value 8021.50 26982.01 0.00 Ln(marketvalue) 9.38 9.98 0.00 ROA 0.13 0.12 0.75 Liquidity 0.18 0.17 0.87 Leverage 0.43 0.38 0.11
Panel A shows the summary statistics of the means for the dependent variable and the continuous control variables used in the multivariate analysis, values for Deal value and Market value are in millions of euro’s. Relative size is a ratio of deal value/market value, Ln(marketvalue) is the logarithm of the market value, ROA is the return on assets, calculated by total assets/net income, liquidity is cash holdings/total assets, leverage is calculated by debt/equity. The Difference test is a T-test on the difference of 2 sample means with unequal variances. Where the mean buy-and-hold abnormal return is the value weighted average of the individual BHARs (Adhikari and Sutton, 2016). Panel B provides statistics on the dummy variables used in the multivariate analysis.
Panel B
Dummy variables Categories Family Non-family
Number Percentage Number Percentage
Diversifying Focus increasing 21 34.4% 31 25.6%
Non-focus increasing 40 65.6% 90 74.4%
Cross-border Domestic 28 45.9% 44 36.4%
Cross-border 33 54.1% 77 63.6%
Legal origin Shareholder 11 18.0% 40 33.1%
Stakeholder 50 82.0% 81 66.9%
Public target Public 20 32.8% 41 33.9%
Non-public 41 67.2% 80 66.1%
Share Share payment 15 24.6% 31 25.6%
Table 3. Correlation matrix
This table reports the correlation coefficients for the main variables. Diversification is 1 if the target is not in the same 2-digit industry, the same industry is 0. Cross Border is 1 if the target is in located in another country than the acquirer, the same country is 0. Ln(marketvalue): The Log of the acquirer’s market value 40 days before the acquisition. Relative dealsize: Is calculated by the deal value/market value 40 days before to the acquisition. Public: A dummy variable will be used, public is 1 if the target firm is publicly traded and public is 0 if a target firm is not. Shares: A dummy variable for primary payment, when the primary payment is shares the dummy is 1, for other methods of payment the dummy is 0. ROA: Earnings before interest and depreciation/Total Assets. Liquidity: Liquidity is Cash-holdings/Total Assets. Leverage: Is calculated by Debt/Equity.
4.2 Empirical results
The first model of table 4 shows the impact of family ownership (family) on the dependent variable, the 3-year-buy-and-hold abnormal returns (BHARs).
Table 4. Regression results
The sample consists out of 182 observations between 2009-2013. Where Stakeholder_F is the interaction between the Family and Stakeholder dummies. Standard errors are White’s heteroscedasticity consisted standard errors estimates and placed between brackets. ***, **, * Stand for statistical significance at the 1%, 5% and 10% level, respectively.
Family Diversification Cross
Border Stakeholder ln(marketvalue)
Relative Dealsize Public
Share
payment ROA Liquidity Leverage
Family 1.000 Diversification .092 1.000 Cross Border -.092 -.036 1.000 Stakeholder .150 .035 .106 1.000 Ln(marketvalue) -.385 .082 .199 -.054 1.000 Relative Dealsize .158 -.168 -.033 .029 -.593 1.000 Public -.010 .040 -.044 .072 .161 -.001 1.000 Share Payment -.011 -.088 -.228 -.067 -.296 .400 .123 1.000 ROA .029 .063 .096 -.138 .159 -.151 -.075 -.162 1.000 Liquidity .009 .103 -.081 -.127 -.127 .131 -.041 .157 -.136 1.000 Leverage .130 -.082 -.111 .049 -.161 .106 .066 -.009 .111 -.180 1.000 (1) (2) (3) Intercept 3.263*** .96 3.183*** (1.00) 3.185*** (1.01) Family .053 .09 .039 (.10) -.056 (.34) Stakeholder_F - - - - .121 (.37) Stakeholder - - .107 (.12) .078 (.12) Ln(marketvalue) -.303*** (.09) -.303*** (.09) -.304*** (.095) Relative Dealsize -.305 (.19) -.309 (.19) -.304* (.18) Public .136 (.10) .129 (.10) .133 (.10) Share Payment .001 (.12) .010 (.12) .015 (.13) ROA -.225 (.63) -.157 (.63) -.107 (.65) Liquidity -.050 (.05) -.036 (.05) -.038 (.05) Leverage .059 (.25) .056 (.25) .054 (.24)
Year fixed Effects Yes Yes Yes
Industry Fixed Effects Yes Yes Yes
It shows that family firms have a 5,3% higher return than non-family firms, based on the market adjusted BHARs. However, this statistic is insignificant and therefore;
Hypothesis 1: family firms have a higher long-term post-acquisition performance than non-family firms. Is Rejected
These findings are in line with Caprio et al. (2011), they found that family firms in Europe do not destroy value when they acquire, but do not find a significant positive effect either.
The second model of table 5 shows the impact of family ownership (Family) in combination with industrial diversification by family firms (Diversification_F) and the impact of cross-border diversifying acquisitions by family firms (Cross Border_F). Family ownership has a slight more positive impact (11,0%) on the BHAR compared to table 5 model 1 (5,3%), however the results are still insignificant. Notable is the negative relation of industrial diversification by a family firm on the BHAR (-34,7%), which is significant at the 10% level. So, if a family firm acquires in another industry, the BHAR is expected to drop with 34,7%. This is in line with Kim et al. (2014), who state that family firms make suboptimal investment decisions to hedge their personal portfolio. The adjusted R-squared increases between model 1 and model 2, suggesting that the added variables have explanatory power. The effect of
cross-Table 5. Regression results
(1) (2) Intercept 3.276*** (1.04) 3.144*** (1.02) Family .054 (.10) .110 (.15) Diversification_F - - -0.347* (.20) Cross Border_F - - .104 (.19) Diversification -.148 (.10) -.023 (.12) Cross Border -.001 (.10) -.038 (.11) Stakeholder .113 (.12) .134 (.12) Ln(marketvalue) -.307*** (.10) -.297*** (.10) Relative Dealsize -.338* (.19) -.348* (.19) Public .135 (.11) .131 (.10) Share Payment 0.007 (.11) -.000 (.12) ROA -.109 (.60) -.095 (.58) Liquidity -.015 (.05) -.032 (.05) Leverage .042 (.25) .048 (.24)
Year Fixed Effects Yes Yes
Industry Fixed effects Yes Yes
Adjusted R2 .047 .053
border acquisitions by family firms on the BHAR is a positive 10,4%, however, this variable is insignificant. Therefore;
Hypothesis 2: family firms destroy value in industrial or cross-border diversifying acquisitions. Is partially rejected
The third model of table 4 shows the performance of family firms in stakeholder oriented countries (Stakeholder_F). It shows an increased BHAR of 12.1% if a family firm is located in a stakeholder oriented country. However, the Beta is insignificant. This is in line with Faccio and Lang (2002) and Franks et al., whom both state that family ownership is an effective ownership structure in Continental Europe, which is shareholder oriented. However, they did not find that it was a better or a more effective ownership structure.
Hypothesis 3: family firms have a higher long-term post-acquisition performance in stakeholder oriented countries. Is rejected
Overall the adjusted R-squared, the measurement for goodness of fit, is relatively low. This relatively low value is consistent with previous literature on the effect of family firms on the buy-and-hold abnormal returns (Chen et al., 2007).
4.3 Robustness checks
Several robustness checks are performed to test whether the assumptions for an accurate OLS regression hold. The null hypothesis of the White test was rejected, meaning that the error term is heteroskedastic as the variance of the residuals is not constant, they could be explained by the regressors used. Consequences include the possibility of inappropriate standard errors. Therefore, White’s heteroscedasticity consisted standard errors estimates are used in all models.
5. DISCUSSION
5.1 Theoretical implications
This study makes several contributions to the current literature. First, it strengthens the current M&A literature of family firms since my sample confirms that family firms do not perform significantly better than non-family firms in Europe, concluding the same as Caprio et al. (2011). It might be that no relationship can be found as previous literature suggests that both positive and negative effects are linked to family ownership. E.g. increased monitoring, limited scope of labour competition (Perez-Gonzalez, 2006), not pursuing firm value maximization, special dividends, excessive compensation packages (Anderson and Reeb, 2003), and tunnelling (Bertrand et al., 2002) all influence the effectiveness of family ownership. Future research should elaborate on a model where these different factors are individually represented to produce a more insightful model of what drives family performance.
Anderson & Reeb, (2003) found that firms that diversify by industry in the US create value. However, my paper found that in a European setting family firms destroy value when acquiring in other industries. A possible explanation might be that minority shareholders value industrial diversification different in the US than in Europe. Extra agency costs might be imposed on minority shareholders in Europe, as they are less protected by law. The use of dual-class shares or pyramid like structures is higher in Europe, and dilutes minority shareholder voting power (Barontini and Caprio, 2006). Bigelli and Mengoli (2004) show that majority shareholders gain more in industrial diversifying mergers than the minority shareholders. Shareholder’s wealth is destroyed, but private gains increase for families. The negative market reaction is represented in the BHAR. However, the gain in private benefits for families is not respresented, which could explain why family firms still acquire in other industries. Furthermore, no effect is found on the effect of cross-border diversifying acquisitions. A possible explanation is that the drop in systematic risk for the firm is diminished by factors such as political risk, increased agency problems, asymmetric information and managers’ self-fulfilling prophecies (Kwok and Reeb, 2000).
5.2. Practical implications
New investors and existing minority shareholders, should be aware of the different factors that drive majority family shareholders. As they try to diversify their portfolio trough the firm’s assets, minority shareholder might be exposed to severe agency costs. For this reason, they must refrain from investing or sell their investments in family firms that seek to acquire in other industries. also, majority family owners should be aware that risk reducing measures, such as diversifying by industry, is value destroying. They should only diversify by industry if their increase in private benefits is sufficient to cover for the possible loss in value.
5.2 Limitations and Future Research
Despite the several contributions this report has some limitations that need to be addressed, these need further development in future research. One of the more severe limitations in the dataset that needs to be addressed is the lack of a proper benchmark index. The benchmark used to measure BHAR in this report is value-weighted market returns. The benchmark returns for market-adjusted BHARs are the Thomas Reuters Datastream value-weighted returns of the stock exchange in which the firm has its primary listing. The problem here lies in the fact that large firms are overrepresented and higher weighted in this index than smaller family firms. Price changes occurring at large firms have much more impact on this index than smaller family firms have, making it hard to generalize results for family firms alone. Future research should account for this type of generalization of results, by diversifying, splitting or using different weight valuations for portfolios. Fama and French’s (2015) five factor might bring a solution to this problem. This model provides portfolios that specifically are made up of small firms. Unfortunately, not all these portfolios are country specific yet (Fama & French, 2012), thus future research should establish more country specific portfolios to distinguish local and global factors.
performance of an organization, other than the acquisition, since there is much more time for external effects to take place. The low explanatory power of the adjusted R-squared strengthens the suspicion that other factors, such as the above mentioned, probably have an impact during the period between the acquisition date and the BHAR after three year. Therefore, future research should consider non-economic actualities and should establish a control variable with major events that have occurred between the acquisition and post-acquisition measurement. The relatively low adjusted R-squared is not only a product of unmeasured and unidentified variables. Another reason for this relatively low adjusted R-squared is because of the small and heterogeneous population of listed family firms that made significant acquisitions, therefore data dispersion is inevitable. The relatively low R-squared in all models of table 5 and 6, is consistent with previous literature that investigated the effect of family ownership on buy-and-hold abnormal returns (Chen et al., 2007).
Another limitation concerning the dataset is that due to the lack of data availability this study is constrained on its robustness test on the family ownership variable. The family ownership variable comprises here a family or an individual that is the ultimate owner at a 25% threshold (Franks et al., 2011). The robustness test would comprise a variable where a family or an individual would have a threshold of less than 25%. Unfortunately, this data is not readily available and due to time constraints, it is impossible to check this variable for robustness. Future research should specify a robustness variable and include it in the model.
this affects the relation between family ownership and the BHAR. A useful cluster classification is provided by GLOBE, which found strong support for ten different cultural clusters: Anglo cultures, Latin Europe, Nordic Europe, Germanic Europe, Eastern Europe, Latin America, Sub-Sahara Africa, Arab cultures, Southern Asia and Confucian Asia (House et al., 2004).
Lastly, this study does not discriminate between founding family and offspring of a family that is leading the company, this should be done as Anderson & Reeb (2003) suggest this has an impact on family firm performance.
6. CONCLUSION
References
Adhikari, H. P., & Sutton, N. K. (2016). All in the family: The effect of family ownership on acquisition performance. Journal of Economics and Business, 88, 65-78.
Anderson, R. C., & Reeb, D. M. (2003). Founding‐family ownership and firm performance: evidence from the S&P 500. The journal of finance, 58(3), 1301-1328.
Anderson, R. C., & Reeb, D. M. (2003). Founding-family ownership, corporate
diversification, and firm leverage. The Journal of Law and Economics, 46(2), 653-684.
Andrade, G., Mitchell, M. L., & Stafford, E. (2001). New evidence and perspectives on mergers. Harvard Business School Working Paper No. 01-070
Andres, C. (2008). Large shareholders and firm performance—An empirical examination of founding-family ownership. Journal of Corporate Finance, 14(4), 431-445.
Asquith, P., Bruner, R. F., & Mullins, D. W. (1983). The gains to bidding firms from merger.
Journal of Financial Economics, 11(1-4), 121-139.
Back, Y., Parboteeah, K. P., & Nam, D. I. (2014). Innovation in emerging markets: the role of
management consulting firms.Journal of International Management,20(4), 390-405.
Barontini, R., & Caprio, L. (2006). The effect of family control on firm value and
performance: Evidence from continental Europe.European Financial Management,12(5),
689-723.
Basu, N., Dimitrova, L., & Paeglis, I. (2009). Family control and dilution in mergers. Journal
of Banking & Finance, 33(5), 829-841.
Bauguess, S., & Stegemoller, M. (2008). Protective governance choices and the value of acquisition activity.Journal of Corporate Finance,14(5), 550-566.
Berger, P. G., & Ofek, E. (1996). Bustup takeovers of value‐destroying diversified firms.The Journal of Finance,51(4), 1175-1200.
Bertrand, M., Mehta, P., & Mullainathan, S. (2000).Ferreting out tunneling: An application to
Indian business groups(No. w7952). National Bureau of Economic Research.
Bigelli, M., & Mengoli, S. (2004). Sub-optimal acquisition decisions under a majority
shareholder system. Journal of Management and Governance,8(4), 373-405.
Caprio, L., Croci, E., & Del Giudice, A. (2011). Ownership structure, family control, and acquisition decisions. Journal of Corporate Finance, 17(5), 1636-1657.
Carr, C., & Bateman, S. (2009). International strategy configurations of the world’s top
family firms.Management International Review,49(6), 733-758.
Casson, M. (1999). The economics of the family firm. Scandinavian Economic History
Chang, S. (1998). Takeovers of privately held targets, methods of payment, and bidder returns. The Journal of Finance, 53(2), 773-784.
Chen, X., Harford, J., & Li, K. (2007). Monitoring: Which institutions matter?.Journal of
Financial Economics,86(2), 279-305.
Claver, E., Rienda, L., & Quer, D. (2007). The internationalisation process in family firms: choice of market entry strategies.Journal of General Management,33(1).
Demsetz, H., & Lehn, K. (1985). The structure of corporate ownership: Causes and consequences.Journal of political economy,93(6), 1155-1177.
Faccio, M., & Lang, L. H. (2002). The ultimate ownership of Western European corporations. Journal of financial economics, 65(3), 365-395.
Fama, E. F., & French, K. R. (2012). Size, value, and momentum in international stock returns. Journal of financial economics, 105(3), 457-472.
Fama, E. F., & French K. R. (2015). A five-factor asset pricing model. Journal of Financial
Economics, 116(1), 1–22.
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control.The journal of law and Economics,26(2), 301-325.
Fernández, Z., & Nieto, M. J. (2005). Internationalization strategy of small and medium‐sized family businesses: Some influential factors.Family Business Review,18(1), 77-89.
Franks, J., Mayer, C., Volpin, P., & Wagner, H. F. (2011). The life cycle of family ownership: International evidence. Review of Financial Studies, hhr135.
Fuller, K., Netter, J., & Stegemoller, M. (2002). What do returns to acquiring firms tell us? Evidence from firms that make many acquisitions.The Journal of Finance,57(4), 1763-1793. Furfine, C. H., & Rosen, R. J. (2011). Mergers increase default risk.Journal of Corporate Finance,17(4), 832-849.
Gedajlovic, E., Lubatkin, M. H., & Schulze, W. S. (2004). Crossing the threshold from founder management to professional management: A governance perspective. Journal of
management studies, 41(5), 899-912.
Ghosh, A. (2001). Does operating performance really improve following corporate acquisitions. Journal of corporate finance, 7(2), 151-178.
Giovannetti, G., Ricchiuti, G., & Velucchi, M. (2011). Size, innovation and
internationalization: a survival analysis of Italian firms.Applied Economics,43(12), 1511-1520.
Harford, J. (1999). Corporate cash reserves and acquisitions. The Journal of Finance, 54(6), 1969-1997.
Haspeslagh, P. C., & Jemison, D. B. (1991).Managing acquisitions: Creating value through corporate renewal(Vol. 416). New York: Free Press.
Hofstede, G. (1983). National cultures in four dimensions: A research-based theory of cultural differences among nations. International Studies of Management & Organization, 13(1-2), 46-74.
Hofstede, G. (1998). Identifying organizational subcultures: An empirical approach. Journal
of management studies, 35(1), 1-12.
House, R. J., Hanges, P. J., Javidan, M., Dorfman, P. W., & Gupta, V. (Eds.). (2004). Culture,
leadership, and organizations: The GLOBE study of 62 societies. Sage publications.
Khan, J.F. & Massoudi, A, (2017), US raids on cheaper rivals send European M&A soaring,
Financial Times.
Kim, C., Pantzalis, C., & Park, J. C. (2014). Do family owners use firm hedging policy to hedge personal undiversified wealth risk?.Financial Management,43(2), 415-444.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The
American economic review, 76(2), 323-329.
John, K., Litov, L., & Yeung, B. (2008). Corporate governance and risk-taking. The Journal
of Finance, 63(4), 1679-1728.
Kwok, C. C., & Reeb, D. M. (2000). Internationalization and firm risk: An upstream-downstream hypothesis. Journal of International Business Studies, 31(4), 611-629.
Malmendier, U., & Tate, G. (2008). Who makes acquisitions? CEO overconfidence and the market's reaction.Journal of financial Economics,89(1), 20-43.
Lumpkin, G. T., & Brigham, K. H. (2011). Long‐term orientation and intertemporal choice in family firms.Entrepreneurship Theory and Practice,35(6), 1149-1169.
Lyon, J. D., Barber, B. M., & Tsai, C. L. (1999). Improved methods for tests of long‐run abnormal stock returns.The Journal of Finance,54(1), 165-201.
Martynova, M., & Renneboog, L. (2009). What determines the financing decision in
corporate takeovers: Cost of capital, agency problems, or the means of payment?.Journal of Corporate Finance,15(3), 290-315.
Maury, B. (2006). Family ownership and firm performance: Empirical evidence from Western European corporations. Journal of Corporate Finance, 12(2), 321-341.
Minetti, R., Murro, P., & Zhu, S. C. (2015). Family Firms, Corporate Governance and
Export.Economica,82(s1), 1177-1216.
Moeller, S. B., Schlingemann, F. P., & Stulz, R. M. (2004). Firm size and the gains from acquisitions. Journal of financial economics, 73(2), 201-228.
Morck, R., Shleifer, A., & Vishny, R. W. (1990). Do managerial objectives drive bad acquisitions?.The Journal of Finance,45(1), 31-48.
Morck, R., & Yeung, B. (2003). Agency problems in large family business groups.Entrepreneurship theory and practice,27(4), 367-382.
Pérez-González, F. (2006). Inherited control and firm performance. The American economic review,96(5), 1559-1588.
Porta, R. L., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and finance. Journal of political economy, 106(6), 1113-1155.
Robe, Michel A. “Harsh Penalties and Warrants: The Impact of Limited Liability Rules.” Working paper. Washington, D.C.: American University, 2002.
Shleifer, A., & Vishny, R. W. (1986). Large shareholders and corporate control.Journal of political economy,94(3, Part 1), 461-488.
Shleifer, A., & Vishny, R. W. (2003). Stock market driven acquisitions. Journal of financial
Economics, 70(3), 295-311.
Simnett, R., Vanstraelen, A., & Chua, W. F. (2009). Assurance on sustainability reports: An international comparison.The accounting review,84(3), 937-967.
Sirmon, D. G., & Hitt, M. A. (2003). Managing resources: Linking unique resources,
management, and wealth creation in family firms.Entrepreneurship theory and
practice,27(4), 339-358.
Stahl, G. K., & Voigt, A. (2004). Impact of cultural differences on merger and acquisition performance: A critical research review and an integrative model. In Advances in mergers and acquisitions(pp. 51-82). Emerald Group Publishing Limited.
Stein, J. C. (1989). Efficient capital markets, inefficient firms: A model of myopic corporate
behavior.The Quarterly Journal of Economics,104(4), 655-669.
Tallman, S., & Li, J. (1996). Effects of international diversity and product diversity on the
performance of multinational firms.Academy of Management journal,39(1), 179-196.
Zhou, Y. M., Li, X., & Svejnar, J. (2011). Subsidiary divestiture and acquisition in a financial crisis: Operational focus, financial constraints, and ownership.Journal of Corporate
