Family ownership, multiple blockholders and acquiring firm performance

Transcription

1 Family ownership, multiple blockholders and acquiring firm performance Investigating the influence of family ownership and multiple blockholders on acquiring firm performance Master Thesis Finance R.W.C. Huberts Date: Defense date: Supervisor: Prof. Dr. Luc Renneboog Tilburg University, Department of Finance

2 Abstract This paper researches the effects of family ownership and multiple blockholders on acquiring firm performance in the first 15 countries of the Euroepean Union during the years On average, the market reaction to acquiring firms is positive. Family firms do have better acquiring performance compared to non-family firms and family firms with a founding family CEO have better acquiring performance compared to family firms without a founding family CEO. Although family firms with a family as second blockholder seem to underperform family firms with a non-family second blockholder and firms without a second blockholder, the results are not significant and solid conclusions cannot be drawn on this part of the thesis. Master Thesis Finance R.W.C. Huberts 2

3 Table of contents Abstract..2 Table of contents Introduction Theoretical framework Definition of a family firm Ownership structure and agency theory Potential benefits for firms with a controlling shareholder Potential costs for firms with a controlling shareholder Potential benefits for family firms Potential costs for family firms Influence of a founding family CEO Influence of descendants as founding family CEO Multiple blockholders and family firms Legal origin, investor protection and corporate governance Ownership structure and M&A performance Family firms and acquiring firm performance Multiple blockholders and acquiring firm performance Determinants of acquiring firm performance Target firm characteristics Acquiring firm characteristics Transaction characteristics Hypotheses Research methodology Data and sample selection Explanation of independent variables Sample statistics Methodology Event timin Calculation of Abnormal Return...33 Master Thesis Finance R.W.C. Huberts 3

4 3.4.3 Analysis of Abnormal Return Testing the significance of the Cumulative Abnormal Returns Data analysis and results Market reaction on acquirers to takeover announcements Market reaction to takeover announcement by deal characteristics Acquiring firm determinants of the market reaction to deal announcements Acquiring family firm determinants of the market reaction to deal announcements Robustness checks Conclusion References...51 Master Thesis Finance R.W.C. Huberts 4

5 1 Introduction Family firms are an essential part for economies all over the world. Not only because of their contribution to the economy, but also because of the long-term stability they bring. According to the EFB (European Family Businesses), family firms count for 60% of all European firms. Moreover, they take care for 40%-50% of all employment. However, in research family firms are just rarely investigated separately from non-family firms. Where some literature can be found on the performance of family firms, the merger and acquisition performance of family firms remains underexposed in literature. So this thesis will fully concentrate on the acquisition performance of family firms. The existing literature on family firms are primarily concentrated on the performance of family firms relative to non-family firms. Anderson & Reeb (2003) report relatively better performance for family firms compared to non-family firms. Barontini & Caprio (2006) state that founding family management also leads to better valuation. According to these two papers and other papers, like Villalonga & Amit (2006), family firms with a founding family CEO even outperform family firms without a founding family CEO. However most of the studies regarding family firms are concentrated on performance, the essence and source of the differences in performance are practically the same for merger and acquisition performance. The ownership structure of family firms plays a key role in the base for better performances of family firms. Berle & Means (1932) and Jensen & Meckling (1976) examined the agency costs on the ownership structure. Jensen & Meckling (1976) conclude a negative relationship between the relative part the manager owns a firm and agency costs. This view, where the presence of a large shareholder can lower the agency problems between managers and owners of a firm, is widely accepted. In family firms, the family owns a relatively large part of the shares and the founding family is seated on at least one managing position. Hereby the relatively low agency costs of family firms takes care for a positive impulse of the performance. However, also views which explain other agency problems in the light of the presence of a large controlling shareholder, are present in the literature. Grossman & Hart (1980) explain this agency problem as private benefits. Large controlling shareholders may choose to benefit Master Thesis Finance R.W.C. Huberts 5

6 themselves and harm the interests of the minority shareholders. Dyck & Zingales (2004) observe the size of the private benefit to be 14% of the equity of a firm. So the effect of lower agency costs within firms with a large controlling shareholder may be diminished by the value-destroying effect of private benefits. Which of the two effects will exceed the other will be researched in the literature and by answering the main question through empirical research. This thesis will focus on whether European family firms do have better acquiring performance compared to European non-family firms. Notable is the fact that only acquiring performance will be investigated and so in this thesis family firms are not investigated as target. Also the influence of the presence of a founding family CEO in family firms and the type of second blockholder of family firms on the acquiring performance of family firms will be researched. The paper is organized as follows: Section 2 describes the theoretical framework, Section 3 describes the methodology, in Section 4 the data analysis and the results are presented and Section 5 consists of the conclusion and recommendations. Master Thesis Finance R.W.C. Huberts 6

7 2 Literature review To give an overview of the wide-ranging literature regarding family ownership, the literature overview is divided into several blocks. First the definition of a family firm for this research is determined out of the existing literature on family ownership. Because the link between family ownership and M&A performance exists of two steps, the literature regarding family ownership will be divided in two blocks. First, the effects of family ownership on agency problems will be discussed and the second step is to discuss the effects of this kind of ownership structure on M&A performance. In addition to the survey of the effects of family ownership, the effect of multiple large blockholders in family firms will be investigated. Last, the determinants of M&A performance will be detected, to get an overview of the control variables which should be added to the regression. 2.1 Definition of a family firm The definition of a family firm is widely discussed in economic papers. Flören (1998) uses three characteristics to determine a family firm in the Netherlands. First, the founding family should own more than fifty percent of the shares of the firm. The second characteristic is that the founding family still has major influence on strategic decisions and founding family members are settled one the most important positions in the firm. Third, at least two founding family members should have a place in the Board of Directors or in the Board of Supervisors. According to Flören (1998) at least two of these characteristics should be present in a firm to label it as a family firm. Andres (2008) uses, based on Anderson & Reeb (2003a), three different categories for family firms. The founder is still CEO, a founding family descendant is CEO and the category where the founding family does have voting shares but passively manage the firm. According to Andres (2008), the founding family should have at least 25% of the voting shares to label the firm as a family firm. When the founding family has less than 25% of the voting shares, a founding family member should be present in the Board of Directors or the Board of Supervisors to label the firm as a family firm. Barontini & Caprio (2006) use a threshold of 10% family ownership to identify a family firm. But in addition to the ownership threshold, they divide the labelled family firms into three classes: Family presence in the Board of Directors or the Board of Supervisors, a founding Master Thesis Finance R.W.C. Huberts 7

8 family CEO or only family ownership without presence of the founding family in the Boards nor as CEO. Maury (2006) determines family firms with a threshold of 10% of the voting rights which should be owned by the founding family. But he distinguishes these family firms into several gradations of family ownership. Most important are the groups of actively managed family firms and non-actively managed firms. The separation of these groups is in line with Barontini & Caprio (2006). Summarized it can be stated that the definition of family firms is widely ranged, because different thresholds for family ownership are used. But most papers do distinguish different levels of family control. Most important is the separation of family firms which are actively managed, with a founding family CEO, and family firms which are not actively managed, with a founding family member in the Board of directors or in the Board of Supervisors. This paper will define a firm to be a family firm when the founding family has more than 10% of the voting shares and a founding family member in the Board of Directors or in the Board of Supervisors. In line with Andres (2008), Barontini & Caprio (2006) and Maury (2006) state that the effects for family firms with an founding family member as CEO may even be greater. 2.2 Ownership structure and agency theory Family firms are an example of firms with a (relatively) large controlling shareholder. This structure has potential benefits and potential costs, both related to the agency theory. So first the potential benefits and costs for firms with a large controlling shareholder will be determined. But because there may be differences between family firms and other types of large controlling shareholder firms, the potential benefits and costs specifically related to family firms will be determined in the sections and Potential benefits for firms with a controlling shareholder Most previous studies show same results regarding to ownership structure and agency costs. Berle & Means (1932) and Jensen & Meckling (1976) examine the agency costs on the ownership structure. The ownership structure is decided upon how much the managers own the firm, with a manager-owned firm as basis. So the manager of the firm can be seen as an Master Thesis Finance R.W.C. Huberts 8

9 agent and the owner of the firm as a principals. When both of the actors in the agency problem try to maximize their utility, the agent may not always act to maximize the principal s utility. The principal tries to ensure that the agent act on their interests. But to ensure the agent acts in the best way for the principal, the principal has to make costs. These costs are called agency costs. Jensen & Meckling (1976) and Fama & Jensen (1983) conclude a negative relationship between the relative part the manager owns a firm and agency costs, also called Agency problem 1. So the size of the agency costs arises from the size of the conflict of interests between the owners and the controllers of the firm. The presence of a large shareholder in family firms should lower the costs of this agency problem. According to Shleifer & Vishny (1997) the reason for this, is the fact that large shareholders have stronger incentives and better resources to monitor the controllers of the firm Potential costs for firms with a controlling shareholder The presence of a controlling shareholder also takes care for another agency problem. Grossman & Hart (1980) call this problem private benefits and explain the problem as the fact that large controlling shareholders may choose to benefit themselves and harm the interests of the minority shareholders. Dyck & Zingales (2004) observe that on average the size of the private benefits is 14% of the equity of a firm. Zhang (1998) dedicates these costs to the lack of diversification of controlling shareholders. Because their lack of diversification, controlling shareholders (especially actively controlling shareholders) may make sub-optimal choices. Another possible source of these agency costs is the fact that founding families may appoint less competent family members to Board positions, instead of professional managers from outside the founding family (Perez-Gonzalez (2006)). All these factors may drive large shareholders, in this case the founding family, to make choices to pursue personal or family objectives and not to pursue profit maximizing. This may lead to agency costs and may be value-destroying for minority shareholders. This agency problem, due to a large controlling shareholders who may harm minority shareholders, is called the Agency problem 2. So the effect of lower agency costs within firms with a large controlling shareholder, may be Master Thesis Finance R.W.C. Huberts 9

10 diminished by the value-destroying effect of private benefits. But interesting is the paper made by Bebchuck et al. (2000). Bebchuck et al. (2000) state that the agency problems may be larger for family firms with controlling shareholders who have a large portion of the voting shares and a relatively low fraction of the cash flow shares. This is because this ownership structure has to deal with large agency costs out of both agency problems. Also Anderson & Reeb (2003) and Villalonga & Amit (2006) find evidence for the negative impact for family firms on firm performance when deviating from the one share one vote rule Potential benefits for family firms Although family firms can be defined as a controlling shareholder firm, several issues do appear only in family firms. These issues, discussed in this part, are partly resulting from the fact family firms are controlling shareholders, but mainly because of the typical structure and characteristics of a family owned firm. According to Demsetz & Lehn (1985), concentrated shareholders have strong incentives to control the managers, resulting in decreasing agency costs. This incentive may even be stronger for family firms, because founding families invested most of their private capital in the company and most important: These families are not well-diversified. So families are an exclusive type of investor, for whom firm survival and close monitoring are relatively important. Because of the fact that families are often for a relatively long term in a business, their abilities and knowledge to monitor are relatively high. When the family firm s CEO is member of the founding family, most of the time few conflicts will arise between the managers and owner. Ward (1988) states that families create a working environment with high loyalty and trust. Not only within the family firm, also with other stakeholders like suppliers of capital. When descendants grow up close to the firm and build trust with stakeholders, this relationship between the family firm and the family firms s stakeholders may continue for a long term. Andres (2008) suggests that these long-term relationship between the founding family and the stakeholders, will lead to relatively high credibility for family firms to commit to implicit contracts. Williamson (1979) states that long-term contracts between shareholders and stakeholders are essential for investments by stakeholders in the family firm. Where implicit contracts are less costly than complete contracting, implicit contracting may be desired by firms. But, according Master Thesis Finance R.W.C. Huberts 10

11 to Williamson (1979), shareholders must gain trust of (potential) stakeholders to establish a basis for implicit contracting. Because of the long-term presence and, stated by Tagiuri & Davis (1997), the relatively large loyalty and trust generated by family firms, family firms might benefit from these implicit contracts with stakeholders. Most of the founding families see their firm as an asset that should be passed on to each succeeding generation (Casson (1999)). Since most of the founding families are not focussed on the short-term profit-maximization, their investment decisions are based on the long-term profitability, according to James (1999). Stein (1988) states that firms which intent to invest with a long horizon are relatively better managed and do relatively less harm long-term profitability in order to create higher current earnings. In conclusion, it can be stated that family firms make more efficient investments, which are based on the long-term consideration of profits and the highest net present value Potential costs for family firms The typical structure and characteristics of a family firm do not only lead to potential benefits, it also may take care of several costs. In line with the potential costs for firms when the largest shareholder is also controlling the firm, Fama & Jensen (1985) also state that for family firms that the combination of control and ownership may lead to sub-optimal decisions. This may be the fact because of the interests of the family may not be the same as the interests of other, often smaller, shareholders. According to Faccio et al. (2001), entrenched families may have incentives to exchange profits for private benefits. If family firms have incentives to exchange private benefits out of the firm, they expropriate minority shareholders instead of maximizing profits. Faccio et al. (2001) give a good example for this event, because their research is based on East Asia, where, compared the Europe, a relatively high fraction of the firms is controlled and owned by a family. Comparing the dividend rates of both parts of the world, the highest dividend rate is paid in Europe. It can be concluded that expropriation of minority shareholders is larger in East Asia than in Europe. Andres (2008) provides another potential cost, by stating that family firms might choose for relatively low risk strategies, because founding families are generally undiversified. For Master Thesis Finance R.W.C. Huberts 11

12 example when family firms invest in projects that are uncorrelated with the family firm s core business. These projects might not lead to benefits for the minority shareholders, who might diversify their portfolio independent of the investment choices of the family firm they invested in. Not only the investments of family firms may be less diversified, also strategies to raise capital may be less risky for family firms compared to other firms. For example by using less debt financing. These strategies might lead to less advantage of the tax shield, which harms the benefits of the well-diversified minority shareholders. However, Anderson & Reeb (2003b) do conclude the opposite: equal leverage ratios for family and non-family firms. So Anderson & Reeb (2003b) do not support the relationship between family ownership and minority shareholders expropriation. They even state that minority shareholders of family firms in the U.S. have advantages of the presence of a founding family Influence of a founding family CEO When investigating family firms and their ownership structure, most of the papers accentuate the special influence of the presence of a founding family CEO. This can be seen as an actively managing founding family, where family presence in the Board of Directors or in the Board of Supervisors can be seen as a passively or controlling form of managing. When founding family members take place in the top positions of management, like the CEO position, the owner-management structure takes care of owner and management being largely in line with each other. Which leads to relatively low agency costs (type 1). Besides, Demsetz & Lehn (1985) state that this owner-management structure mitigates the managerial expropriation. However, Villalonga & Amit (2006) find that an active managing founding family also has negative effects. When the protection of minority shareholders is weak and the founding family has relatively high ownership, the effect of expropriation of minority shareholders may be relatively high. So the combined effects of active management by the founding family may be positive or negative at different ranges of founding family ownership. Analysing papers regarding actively managing founding family, most researches identify a positive effect for the presence of a founding family CEO. Examples of papers, with a sample of U.S. firms, identify a positive effect between a founder-ceo and corporate governance are Master Thesis Finance R.W.C. Huberts 12

13 Anderson & Reeb (2003) and Villalonga & Amit (2006). According to these papers founding family CEOs seem to have a positive influence and certain skills which lead to better governance. But not only research among U.S. firms leads to this outcome. Also Barontini & Caprio (2006) find that founding family management is relatively strong positive related to the valuation of these firms. This may be the result of the family s long presence in the firm, which leads to a relatively good reputation. Other reasons for the positive relation between founding family management and better corporate governance may be given in the papers Davis et al. (1997) and Hart (2001). Davis et al. (1997) state that family members are protectors of the family wealth and the family wealth is directly linked to their own well-being. So founding family CEOs tend to be more committed. In line with this, Hart (2001) argues that outsider CEOs may suck cash and wealth out of the firm. This is in contrast with founding family CEOs, who try to prevent the family firm from unnecessary outflows Influence of descendants as founding family CEO Most literature agrees upon the fact that founding family CEOs generally have positive effects on the corporate governance of family firms. But in the extension of the discussion about founding family CEOs, also the discussion about inheritance of functions in family firms plays an important role in papers about corporate governance in family firms. This section will discuss the proposed effects of founding family descendants management in the important papers about family firms. Villalonga & Amit (2006) find that descendant management decreases the valuation of firms, explained by the fact that a founder CEO adds additional know-how to the firm and this know-how is not expected to transmitted to the descendants of this founder. Morck et al. (1988) state that only older family firms have negative effects on valuation and younger firms do better if a founding family member is on one of the executives positions. In conclusion, descendant CEOs do have negative impact on the valuation of a firm and tend to have less skills compared to founding CEOs. Pérez-González (2006) finds an effect that on average the descendant of a founder CEO takes care of a decline in firm performance compared to firm performance of time with the founder Master Thesis Finance R.W.C. Huberts 13

14 CEO. But Pérez-González (2006) also states that inherited control generally leads to a decline in firm performance. Reasons for the lower performance of descendant-managers in ownermanaged firms, like family firms, is the fact that top executive managers are chosen from a much more restricted pool of talent. Because the family firm generally chooses his new executives from the descendants of the founding family. Where non-family firms can choose all potential managers in the market. This restriction of family is often due to the amenity potential. Which means that founding families or founders derive utility and pleasure from having a descendant running the family firm. This can be seen as a non-financial tool of minority shareholder expropriation. 2.3 Multiple blockholders and family firms Since the paper of La Porta et al. (1999), the conflict between controlling shareholders and minority shareholders has received more attention. La Porta et al. (1999) state that most European firms are in the hands of a few large shareholders. So in contradiction to Berle & Means (1932), who only investigate the agency problem between managers and dispersed shareholders, the second agency problem, between controlling shareholders and minority shareholders, may be equally important. Especially concerning European firms, because La Porta et al. (1999) find relatively strong evidence for a high quantity of firms with controlling shareholders in Europe. To immerse the discussion of ownership structures, the influence of multiple blockholders will be discussed in this section. There are several papers which investigate the pros and cons of a second large shareholders in a firm. Because family firms are firms with a controlling shareholder, the results of the presence of a second large shareholders are very relevant. Lehman & Weigand (2000) report a positive influence of a second shareholder in a survey among German listed companies. A research mentioned before, Faccio et al. (2001), also tests the effect of multiple large shareholders on the dividend pay-out ratio. They find that the presence of multiple large shareholders, next to the controlling shareholder, has dampening influence on expropriation of minority shareholders in Europe. Mainly due to the monitoring effect of multiple large shareholders. In contrast, the presence of multiple large shareholders in Asia leads to more expropriation of minority shareholders. Reason seems to be the collusion of the controlling shareholder and other large shareholders to expropriate minority Master Thesis Finance R.W.C. Huberts 14

15 shareholders. Where these studies only focus on the presence of multiple large shareholder, Maury & Pajuste (2005) focus on the characteristics of the controlling shareholder and the characteristics of the second blockholder. They find that the effect of a second blockholder is not automatically positive. The effect is largely dependent on the size and the identity of these blockholders. When analysing the effects of a second large blockholder in family firms, Maury & Pajuste (2005) find a negative effect on the corporate governance for family firms without a second blockholder. Mainly caused by a higher probability to extract private benefits because of the relatively low control without a second large shareholder. But when the second large blockholder also is a family, the positive influence is even more destroyed compared with solely the founding family as owners of a large part of the shares. 2.4 Legal origin, investor protection and corporate governance The Agency problem 2 plays in important role in the corporate governance of family firms. Due to the power of the controlling shareholder, the minority shareholders can be expropriated. Especially in family firms, where the founding family is owner, controller and in some cases even manager of the firm, private benefits can be extracted out of the firm by the controlling shareholder. Shareholders have several rights to control the managers of the firm they invested in. Example of one of these rights is the voting right. With their voting right shareholders have influence on the corporate policy and may, for example, vote on who will be in the Board of Directors in a firm. Investors with more rights are more protected. La Porta et al. (1999) find that the level of protection of shareholders differs across countries. Most important fundamental for the differences in the world is the legal origin of countries. In countries with a common law tradition, investor protection is relatively high. In countries with French civil law as tradition, investor protection is relatively low. The Scandinavian and German civil law originated countries take intermediate positions regarding investor protection. So investors are subject to different rights in different countries. Master Thesis Finance R.W.C. Huberts 15

16 La Porta et al. (1999) also find evidence for a negative relationship between investor protection and concentrated ownership. Meaning that in countries with the common law tradition, there are more controlling shareholders. Going further into the discussion about legal origin and investor protection, Dyck & Zingales (2004) drop interesting conclusions about investor protection and private benefits. Dyck & Zingales (2004) state that in countries with relatively low investor protection, there is a higher level of private benefits. Mainly because investors with more shareholder rights are more able to monitor the controlling shareholders. So when investigating the discussion about corporate structures and their influence on the quality of the corporate governance, the legal origin of the firm plays an important role. Besides, because La Porta et al. (1999) find evidence for different levels of investor protection across countries, the legal origin of the samples for corporate governance research is important for interpreting the results of the given literature. 2.5 Ownership structure and M&A performance The previous sections describe the literature about the effects of controlling shareholder and, especially, family firms on the corporate structure and the quality of the corporate governance in these particular firms. The following section will go deeper into these effects and link them to acquiring firm performance. As mentioned in the previous section, an outside blockholder may improve control to prevent minority shareholders to be expropriated and to prevent the possibility that founding families make suboptimal choices for shareholder wealth to extract private benefits Family firms and acquiring firm performance As described before, important are the effects of the Agency problem 1 and the Agency problem 2. According to Shleifer & Vishny (1997) and Claessens et al. (2002), family firms have strong incentives and information resources to monitor the managers of a firm. This may lead to relatively low Agency problem 1. But Grossman & Hart (1980) describe an negative effect, called private benefits, of Agency problem 2. Large controlling shareholders may benefit themselves and simultaneously harm the minority shareholders. Summarized, these are the two most important differences between family firms and non-family firms. Also with Master Thesis Finance R.W.C. Huberts 16

17 reference to the literature regarding the differences in acquiring firm performance between family firms and non-family firms, these two agency problems are important. Morck & Yeung (2003) suggest that controlling shareholders, like family firms, may block the innovation of technologies in family firms. The obstruction of innovation in a family firm may lead to slower growth. So family firms might pursue own interests and not the interests of the minority shareholders regarding innovation. Innovation may partly be established through acquiring other firms. So family firms may make suboptimal choices with respect to mergers and acquisitions for minority shareholders because of the reduced innovation in family firms as suggested by Morck & Yeung (2003). Bebchuck et al. (2000) find, as mentioned before, large agency costs for controlling shareholders holding relatively large part of voting rights and relatively small part of cash flow rights. These structure is subject to large entrenchment and small incentives to monitor. Bebchuck et al. (2000) show that deviating from the one share one vote rule leads to distortion of project and investment choices. So family firms with this ownership structure may not be able to make effective choices regarding mergers and acquisitions. Several papers (Buysschaert et al. (2004), Holmen & Knopf (2004), Bae et al. (2002), Biggelli & Mengoli (2004) and Faccio & Stolin (2006)) suggest that controlling shareholders may use their M&A investments to expropriate themselves at the expense of the minority shareholders. According Faccio & Stolin (2006), especially controlling shareholders with a small fraction of the cash flow rights may initiate M&A to maximize their personal (financial) interests rather than maximizing shareholders wealth. Another factor that may drive the expropriation of minority shareholders through M&A, is a poor legal protection of minority shareholders. So the jurisdictions where family firms are located, do have influence on the possibilities to expropriate minority shareholders. But in contrast to the suggestions of these papers, the results obtained from testing the expropriation hypothesis lead to different conclusions among these papers. In line with the suggestion of Faccio & Stolin (2006), the legal origin of these studies play an important role in the issue of expropriation of minority shareholders through mergers and acquisitions. Master Thesis Finance R.W.C. Huberts 17

18 The research of Bae et al. (2002) finds that controlling shareholders in large Korean firms, the so-called chaebols, use M&A to tunnel wealth from the minority shareholders to themselves. Biggelli & Mengoli (2004) state that there is a negative relation between separation of ownership and control and the acquirer s M&A performance among Italian firms. Besides, Holmen & Knopf (2004) and Faccio & Stolin (2006) do not find evidence for the expropriation of minority shareholder through M&A in Western Europe. These findings among European firms are in contrast with the evidence for the expropriation of minority shareholders in Korea. But this difference in findings can be explained by the aforementioned paper of Faccio et al. (2001). This paper states that expropriation of minority shareholders by controlling shareholders is relatively high in East-Asia compared to Europe. Also public firms in English origin countries are investigated. Yen & André (2007) find higher ownership concentration is positively related to value creation in acquiring firm. This is consistent with decreasing agency costs, due to the conflict between owners and controllers, as the dominant shareholder has a higher stake of the firm s shares. Also investor protection is positively related to the performance of acquiring firms after a merger or acquisition. Ben-Amar & André (2006) even find greater positive abnormal returns for Canadian transactions if the acquiring firm is a family firm. They suggest that countries with welldeveloped markets and shareholders protection can reduce the agency problems between the controlling shareholder and minority shareholders. Remarkable, is the fact that according to La Porta et al. (1999), English origin countries, like Canada, do have relatively high investor protection. Ben-Amar & André (2006) also suggest that reason for family firms to achieve better acquiring performances, is the fact that family firms have a relatively large share personal wealth invested in the firm. According to Ben-Amar & André (2006), this large share of personal or family wealth invested in the family firm is a sufficient incentive to maximize firm value and to hold the family from extracting private benefits. So long-term relationships with the investment community can be constructed and maintained, to eventually raise (additional) capital and keep the cost of capital relatively low. Ben-Amar & André (2008) also find evidence for a positive relationship between family ownership and acquiring firm performance. But in addition to Ben-Amar & André (2006), Ben-Amar & André (2008) examine the interactions between family ownership and Master Thesis Finance R.W.C. Huberts 18

19 management, type of agency problem and the acquirer s announcement period abnormal returns. Ben-Amar & André (2008) show that the conflict between shareholders and professional managers, the so-called Agency problem 1 has a detrimental impact on announcement period abnormal returns whereas the agency conflict between large and small shareholders, the so-called Agency problem 2, does not. So it can be stated that among Canadian family firms, the agency problems between owners and managers is reduced by one controlling founding family in such way that the advantages of this reduction of Agency problem 1 are greater than the disadvantages of the increased Agency problem 2. Where the disadvantages of the increased Agency problem 2 are due to the higher possibility of expropriation of minority shareholders in family firms, because founding families do own and control the firm. Notable is the fact that Ben-Amar & André (2006) and Ben-Amar & André (2008) both find evidence for a positive influence of a family firm CEO on the abnormal returns of the acquiring firm around the announcement date. Which is in line with the findings of Anderson & Reeb (2003) and Barontini & Caprio (2006). Because these researches also find positive effects of the presence of a founding family CEO Multiple blockholders and acquiring firm performance The papers in the previous section (Buysschaert et al. (2004), Holmen & Knopf (2004), Bae et al. (2002), Biggelli & Mengoli (2004) and Faccio & Stolin (2006)) suggest that the expropriation of minority shareholders is the main threat for the acquiring performances of family firms. Some legal origins do have better investor protection, what leads to less opportunities for founding families to expropriate their minority shareholders. Summarized, with better investor protection, minority shareholders are better armed to control the founding family. In addition to these fixed control mechanisms, the presence of another large shareholder may lead to a better corporate governance and relatively little expropriation of minority shareholders (Faccio et al. (2001)). Some aforementioned papers, e.g. Faccio & Stolin (2006), suggest that minority shareholders in family firms may be expropriated through M&A decisions. So this section will research literature to investigate whether the presence of Master Thesis Finance R.W.C. Huberts 19

20 multiple blockholders, in addition to the founding family, may lead to better acquiring firm performance for family firm. Research suggests that institutional investors may impact the corporate strategy of firms with a controlling shareholders. Wright et al. (2002) find that the presence of institutional investors has positive influence on value creation by U.S. acquiring firms. However, Kochhar & David (1996) state that not all institutional investors are equally incentived to monitor the controlling shareholder. This means that only institutions that have meaningful positions in the firms are likely to monitor the controlling shareholder actively. This causes the effect that the percentage of shares held by the second blockholder is positively related to the family firm acquiring performance. Ben-Amar & André (2006) also investigate the relation of an outside blockholder and the announcement date abnormal returns for acquiring firms, by adding a dummy to the regression on acquiring firm performance. The relationship between the presence of an outside blockholder and the acquiring performance of family firms shows positive. Outside blockholders prove to have enough power and information resources to monitor the family firm sufficiently. So it can be concluded that outside blockholders ensure that founding families make value creating deals and do not expropriate other shareholders to extract private benefits. 2.6 Determinants of acquiring firm performance This research is focussed on the influence of family ownership and the presence of multiple blockholders on acquiring firm performance. But also other determinants play an important role in the level of acquiring firm performance. This section will focus on the factors that drive, according to the literature, acquiring firm performance in M&A deals Target firm characteristics Faccio et al. (2005) examine the announcement abnormal returns of acquiring firms to listed and unlisted targets. The research is done for western European countries. Faccio et al. (2005) find evidence for better acquiring performances for target firms that are not listed. The acquiring performance for listed target firms is negative but insignificant. Master Thesis Finance R.W.C. Huberts 20

21 Chang (1998) finds the same results for U.S. acquiring firms and suggest the reason for these effects is the monitoring hypothesis. A relatively high fraction of the private held target firms are owned by a small group of shareholders. The creation of these outside blockholders by acquiring private target firms in stock offers may increase firm value (and thus the announcement abnormal returns to the acquirers), because these outside blockholders can serve as effective monitors of managerial performance, according to Shleifer & Vishny (1986) Acquiring firm characteristics According to Moeller et al. (2004), small acquiring firms make better deals compared to big acquiring firms. So the relative size of the acquiring firm plays a positive role in the discussion of acquiring firm performance. Moeller et al. (2004) use a dataset of U.S. firms and find a size effect. Large firms tend to pay a higher premium compared to relatively small firms. Moeller et al. (2004) find evidence for the managerial hubris (overconfidence of successful managers) playing a role in the M&A decisions of large firms Transaction characteristics Travlos (1987) finds interesting evidence for a positive relationship between the payment in cash in the market reaction for acquiring firms to the announcement of M&A. Travlos (1987) suggests that these findings are consistent with the signalling hypothesis. Which implies that when acquiring firms (try to) pay with common stock, they consider themselves as overvalued. So the market generally reacts positive to M&A which are paid with cash. Another deal characteristic that may influence the acquiring firm performance is the relatedness of the acquiring and the target businesses. Datta et al. (1992) note that when target firms are not in the same business as the acquiring firms, the abnormal returns around the announcement date are lower compared to the situation when both the acquiring and the target firm are in related businesses. Lang et al. (1994) suggest that the reason for this may be the fact that synergies are easier to achieve when both firms have related businesses. Martynova & Renneboog (2006) find that the domestic M&A generally generate higher bidder announcement returns compared to cross-border deals. They use a dataset which contains European deals. Again, legal origin plays a role in the possible explanation. Master Thesis Finance R.W.C. Huberts 21

22 Martynova & Renneboog find evidence for positive influence when acquiring firms reside in the U.K. compared to other European firms. So U.K. domestic M&A do lead to positive acquiring firm performance and cross-border M&A with an U.K. target also leads to positive acquiring firm performance. So the driving factor of the positive announcement effects may be the presence of the U.K. target. The U.K. is a country with the common law as legal origin. Because the common law has relatively high investor protection (La Porta et al. (1999)), higher take-over premiums involving U.K. firms are expected. So the fact that domestic M&A in the U.K. are relatively largely present compared to cross-border M&A, tend to be the reason for the positive influence of domestic deals for acquiring firm performance. 2.7 Hypotheses The sections before describe a selection of the available literature regarding family ownership, multiple blockholders and acquiring firm performance. The following section will contain the assumptions made based on the afore described literature. On the basis of these assumptions, the hypotheses will be proposed. The main objective in this research is to investigate whether family firms do have better acquiring performance. It has been clear that family firms have a different corporate structure than non-family firms. Where in non-family firms owners and controller of the firm are separated, in family firm the founding-family own a relatively large fraction of the firm s shares and are present in the Board of Directors or the Board of Supervisors. In non-family firms the main source of agency costs is the separation of ownership and control. The different interests of the owner and the controllers of the firm lead to agency costs. These kind of agency costs are also called the Agency problem 1 costs. Family firms do have less experience with Agency problem 1, because ownership and control are not separated. But in family there is a higher possibility for another type of agency costs. Due to the fact that ownership and control are in the same hands, the possibility for founding families to make suboptimal choices and extract private benefits are relatively large. When founding families extract private benefits, the minority shareholders of the family firm are Master Thesis Finance R.W.C. Huberts 22

23 expropriated. The costs which are made through suboptimal choices by the founding family members are the so-called Agency problem 2 costs. Summarized, in family firms there are two (one negative and one positive) main influences on the quality of corporate governance. However, the founding families are not well diversified and most of the personal and family wealth is invested in the family firm. So the negative effects on the corporate governance due to the Agency problem 2 problems, may partly be solved by the involvement of the founding family. In conclusion, it can be stated that for family firms the positive influence on corporate governance of the relatively low Agency problem 1 is bigger compared to the negative influence on corporate governance of the relatively high Agency problem 2 for family firms. The positive influence on the corporate governance will lead to better investment decisions. This leads to the first hypothesis: Hypothesis 1: Family firms have better acquiring performance compared to non-family firms by having higher cumulative abnormal returns. Family firms are described as firms where the founding family owns a minimal of 10% of the firm and is present in the Board of Directors or in the Board of Supervisors. But in some family firms one of the founding family members is still managing the firm actively. The presence of a descendant on the CEO-seat has negative influence on the corporate governance, because this CEO is selected out of a relatively small pool of potential candidates for the CEO position. But although this negative effects of the presence of a descendant on the CEO seat, the presence of an actively managing founding family member tend to have positive influence on the corporate governance and firm performances. This leads to the second hypothesis: Hypothesis 2: Family firms with a founding family CEO have better acquiring performance compared to family firms with a non-family member as CEO by having higher cumulative abnormal returns. Founding families may not be the only big blockholder in a family firm. Not only in family firms, but also in non-family firms there may be multiple blockholders who are controlling the firm. The presence of such a blockholder may be a good controlling mechanism, because Master Thesis Finance R.W.C. Huberts 23

24 the extraction of private benefits by founding families tend to be impeded by the presence of a second blockholder. The impeded possibilities to expropriate minority shareholders and make suboptimal investment choices to extract private benefits may lead to less Agency problem 2 costs in both, family and non-family firms. But because private benefits play a more important role in family firms, the Agency problem 2 costs tend to be more lowered in family compared to non-family firms due to the presence of a second blockholder. Thereby the third hypothesis is proposed: Hypothesis 3: Family firms with a large second blockholder have better acquiring performance compared to family firms with a small second blockholder by having higher cumulative abnormal returns. In addition to the influence of the size of a second blockholder on the acquiring performance, also the influence of the kind of second blockholder will be investigated. As stated in Maury & Pajuste (2005), family firms with a family as second blockholder have a relatively low quality of corporate governance compared to family firms without a second blockholder. Reason for this is the chance of collusion of the first and second blockholder. According to Maury & Pajuste (2005), the incentives to collude are bigger when both, the first and second blockholder, are families. This collusion may lead to relatively higher extraction of private benefits compared to a family firm without a second blockholder. Which leads to the following (fourth) hypothesis: Hypothesis 4: Family firms with a family as second blockholder have lower acquiring performance compared to family firms without a family as second blockholder by having lower cumulative abnormal returns. Master Thesis Finance R.W.C. Huberts 24

25 3 Research Methodology 3.1 Data and Sample Selection The dataset used for the statistical analyses is obtained from Orbis (Bureau van Dijk) databases. This database contains a company-database and a M&A deal-database, which are used both. DataStream was used to obtain the share prices to calculate to cumulative abnormal returns. Information regarding the mergers and acquisitions are merged with the share prices with the help of Microsoft Excel. The obtained dataset contains merger and acquisition that were announced and took place between January 1st 2009 and January 1st Besides, only merger and acquisitions with an acquirer publicly listed and established in one of the first fifteen members of the European Union are considered. Only merger and acquisition where the acquirer obtains 100% of the shares after the transaction is completed are admitted to the sample. To avoid accounting issues and taking care of effects of the special regulatory environment, acquisitions made by financial institutions are excluded from the sample. After applying these conditions for sample selection, the sample is reduced to 2070 mergers and acquisitions. To avoid estimation biases in the calculation of the cumulative abnormal returns, several announcements have to be eliminated. The estimation window exists of observations starting 300 days before the event, i.e. the announcement date, and ending 60 days before the announcement date. In addition, the event window consists of 60 days, starting 30 days before and ending 30 after the announcement date. To avoid an overlap in the period of calculation of the cumulative abnormal returns, two interventions have to be made. First, a merger or acquisition announced by the same acquirer within less than 300 trading days from a previous announcement are excluded, because the estimation window of the second announcement may be biased by the first announcement. Second, if one firm made multiple bids within 60 days, both deals are excluded due to the overlap in the event window. After these intervention, to avoid estimation biases, the final sample consists of 1343 mergers and acquisitions announcements of completed deals. 3.2 Explanation of independent variables In this research a firm is labelled as family firm when the founding family at least owns 10% of the shares and at least one founding family member has a seat in the Board of Directors or Master Thesis Finance R.W.C. Huberts 25